Stocks I’d Avoid

CHAPTER 9 STOCKS I’D AVOID

What Petter Lynch said here that if I could avoid a single stock, it would be the hottest stock in the hottest industry. Why? Because the one that gets the most favorable publicity is the one that every investor hears about in the car pool or on the commuter train, and succumbing to the social pressure, often buys. Hot stocks can go up so fast, usually out of sight of any of the known landmark of value, but since there’s nothing but hope and thin air to support them, they fall just as quickly. If you aren’t clever at selling hot stocks (and the fact that you’ve bought them is a clue that you won’t be), you’ll soon see your profits turn into losses, because when the price falls, it’s not going to fall slowly, nor is likely to stop at the level where you jumped on.

Another stocks I’d avoid is a stock in a company for example that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney. In my experience the next of something almost never is. In fact, when people tout a stock as the next of something, it often marks the end of prosperity not only for the imitator but also for the original to which it is being compared.

Avoid diworseifications. Instead of buying back shares or raising dividends, profitable company often prefer to blow the money on foolish acquisitions. The diworseifier seek out merchandise that is (1) overpriced, and (2) completely beyond his or her realm understanding. This ensure that losses will be maximized. That’s not to say it’s always foolish to make acquisitions. It’s very a good strategy in situations where the basic is terrible. Acquisition will be succeed because it has a lot to do with a concept called synergy. “Synergy” is a fancy name for the two-plus-two-equals-five theory of putting together related businesses abd making the whole thing work. If a company must acquire something, I’d prefer it to be a related business, but acquisitions in general make me nervous. There’s strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and them mismanaged them. I’d rather see a vigorous buyback of shares, which is the purest synergy of all.  

Beware of the whisper stocks. Whisper stocks have a hypnotic effect, and usually the stories have emotional appeal. If you or I regularly invested in these stocks, we both would need part-time jobs to offset the losses. The may go up before they come down, but as long-term proposition I’ve lost money on every single one I’ve ever bought.

Beware the middleman. The company that sells 25 to 50 percent of its wares to a single customer is in a precarious situation. The loss of one customer would be catastrophic to a company. The big customer has incredible leverage in extracting price cuts and other concessions that will reduce the supplier’s profit. It’s rare that a great investment could result from such as arrangement.