Top 5 Investing Mistakes

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I missed the rally in TATAMOTORS today. When a stock that you don’t own takes off (+11% since yesterday), you are filled with blinding rage. I made the #1 mistake of letting my individual preference interfere with my investment decision. I never liked Tata cars – I feel that they fall apart in a year and their interiors are sub-par. But turns out I missed the wood for the trees. So I sat down and wrote up a list of 5 mistakes that investors should avoid:

  1. Getting confused between the company’s product and its stock. Very often, you may love the product the company makes. You may love the XUV 500, but that’s not a good reason in itself to own M&M. You may hate Airtel’s service, but that’s not a good reason in itself not to own BHARTIARTL.
  2. Getting caught up in a fad without thinking through the economics. The market goes through periods where everybody is talking up one sector. I have seen infatuation with infrastructure stocks, real estate, FMCG, oil & gas all come and go. The only thing that is guaranteed with infatuation is a nasty hangover. Don’t only focus on the sector du jour. Focus on revenue growth, profitability and valuation of companies across sectors.
  3. Hanging on to your losers. We all make mistakes. But hoping for a miracle that will somehow turn a position that is down 10% is stupidity. You should have a stop-loss, or better yet, a trailing stop. Let the losers go.
  4. Letting go of your winners. This is the corollary to #3. Why sell a stock that’s on a hot streak. Own it till the rally exhausts itself. If you have a trailing stop setup, the exit automatically takes care of itself.
  5. Getting confused between trading and investing. My sincerest advice is to leave intra-day trading to computers. High Frequency Trading (HFT) has pretty much taken over most exchanges in the world, driving down holding periods to seconds (on an average, the holding period of a stock in the US is around 22 seconds.) You cannot compete with the machines. Your “short term” should at least be a month. This allows you to do your homework and focus on the total return of your portfolio.

And for those who owned TATAMOTORS before the results, good job!

Questions? Email me: [email protected]

The Dividend Announcers Club

We love dividends at StockViz. In fact, if dividend were to be a girl (or a boy), we would’ve sent her a box of chocolates today. We are constantly on the lookout for new companies that announce dividends. There have been none so far this year, but here’s a handy chart to give you an idea of the number new dividend announcers by year

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When a company announces dividends, we take it as a sign of confidence from management that it can fund its growth through internal cashflows and has some left over to pay out as dividends.

You can use our screener to hunt for these gems and more!

Making P/E work for you

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The general rule with Price-Earnings ratios (P/E) is that the lower a stock’s p/e, the better. And a P/E of less than, say, 10, represents excellent value. A low P/E implies more profit for every dollar you invest. However, P/E is only the starting point in researching stocks. Here are some gotchas that you should be aware of:

  1. One-time gains can artificially inflate a company’s P/E: When a company sells assets, it enjoys a one-time bump in earnings that might make the P/E ratio artificially low. And similarly when there are one-time write-offs, P/Es get high. In either of the two cases, P/E is not a gauge of the company’s true ongoing operating earnings.
  2. A low P/E can be a danger sign: Low P/Es may come about because well-informed investors are selling the stock and pushing the price down, regardless of earnings. In other words, unusually low p/e’s can be a sign of danger rather than a clue to a bargain. For example, the 2.73 PE of Aarvee Denims
  3. Don’t ignore stocks with high P/E: Growth stocks have naturally high P/Es. You should expect to pay more for companies with long-term earnings potential. However, stocks with high P/Es tend to be more vulnerable during periods of broad market setbacks. For example, the nearly 205 PE of Adani Enterprises that has a 50-day volatility close to 80%.

Happy investing!

ETFs are extremely profitable…

… for the banks that make them.

Synthetic ETFs may actually be the most profitable type of fund around, generating an average gross profit margin of 69% for their issuers, compared to physically replicated ETFs, that generate an average gross profit margin of 64%. Much of these profits are delivered via ancillary activities like securities lending, securities finance and swaps. The money is being made elsewhere. Outside of the view of ETF clients. Clients are in fact unwittingly providing capital for banks’ ancillary (and risky) ETF-related activities — while, incidentally, being directly connected to the risks that are being generated.

Read more here: http://ftalphaville.ft.com/blog/2011/07/11/617516/if-you-pay-peanuts-for-etfs-you-get/

and here: http://www.indexuniverse.eu/europe/opinion-and-analysis/7904-etf-providers-earn-double-funds-management-fees-says-deutsche-bank.html?Itemid=126

5 Measures to Ignore

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Previously, we had discussed what to look for while buying stocks. Irrespective of whether you are fundamental or technical investor, there are some key metrics that you should follow to screen stocks. However, even though some metrics have complicated math, they can be completely misleading when it comes to their predictive power. 

Measures like Beta, Analyst Recommendations, P/E and PEG typically have very little bearing to how the stock eventually performs. To read more about the 5 measures to ignore while screening stocks, hop on over to Smart Money here.

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