Friday, December 30, 2011

4 Investment Tips Best Not Followed

As this year draws to a close, a lot of traders and brokers are saying that they are really glad that 2011 is finally over. The stock markets around the world have lost billions of dollars worth of wealth this year & the world is still looking at the Euro zone and the US nervously hoping that the debt crises in these mammoth economies would somehow miraculously pass. The emerging economies are also facing slowing growth, high inflation and rapid depreciation of their currencies. I am writing this article from the Kingdom of Saudi Arabia, which is enjoying a period of great prosperity and the largest budget surplus they ever had till date due to firm oil prices.

In the last 3 yrs several myths were debunked and the perils of the US credit expansion programme which started in the 70's was finally revealed early this year when there was a deadlock in the senate over increasing their credit limit. Through this article, I would like to list a few investment myths which Mark Mobius spoke about a decade ago. I find it makes even more sense in the present context.

Useless Tip #1: Buy stocks! It would anyway go up in the long term:

This is a myth. Readers of my previous articles, need not fear. I still consider investing in good value stocks as the best investment one can make. But before you plunge in to stocks, remember  that far more companies have failed than succeeded. Far more countries' stock markets went to zero than markets, which have survived. Just think of Russia in 1918, all the Eastern European stock markets after 1945, Shanghai after 1949, and Egypt in 1954.

It requires a certain amount of knowledge and skill to become a successful investor. Random bottom fishing just because stocks are beaten down is not a wise investment strategy.

Useless Tip #2:  Real Estate always goes up in the long term

While it is true that real estate has a tendency to appreciate in the long run, partly because of population growth, there is a problem with ownership and property rights. Real estate in London was a good investment over the last 1000 years, but not for America's Red Indians, Mexico's Aztecs, Peru's Incas, Indians and Pakistanis who had to leave because of partition and people living in countries, which became communists in the 20th century. All these people lost their real estate and usually also their lives.

Useless Tip #3:  Buy a basket of high quality stocks and hold

Another highly dangerous rule! Today's leaders may not be tomorrow's leaders. Don't forget that Xerox, Polaroid, Memorex, Digital Equipment, Burroughs, Control Data were the leaders in 1973. Where are they today? Either out of business or their stocks far lower, than in 1973!

When you buy a stock, look for a company with a sustainable competitive advantage. And when a copany starts losing that advantage, it is best you exit the stock.

Useless Tip #4: Buy Low and Sell High

The problem with this rule is that we never know exactly what is low and what is high. Frequently what is low will go even lower and what is high will continue to rise.It is true that very often, bad news provide an interesting entry point, at least as a trading opportunity, into a market.

However, a better long term strategy may be to buy on bad news, which has been preceded by a long string bad news. When then the market no longer declines, there is a chance that the really worst has been fully discounted.

I wish all my readers a Happy and Prosperous New Year. I hope this would be a year when you are able to identify great opportunities and sow the seeds of future wealth.

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