So you’ve got 99 problems but don’t want a stock to be one. We can’t stop the stock market from crashing. But we can limit the number of crashing stocks we own. Use this investment checklist to avoid costly value traps and bankrupting stocks.
1. There are no “hot” stock tips
Well they are out there, but it’s in your best interest not to use them. Great investments create returns over a long period of time, and trying to find the “get rich quick” stock is a fool’s game.
2. Stock analysts aren’t your friend
And most of the time, they are wrong too. You have to look at the self motivation of stock analysts. They are actually paid to be bullish, not if they are wrong. Think about that.
3. Don’t buy OTC penny stocks
The major stock exchanges like the NYSE and NASDAQ are there to protect you. Those major exchanges have strict rules and regulations in place to prevent scams. OTC stocks don’t.
4. IPOs are a scam
Speaking of a scam, an IPO is one if I ever saw it. The IPO’s single purpose is to get the founding owners rich. To invest in a company that hasn’t even released a 10-k yet is blindly insane.
5. You can’t time the market
The market is unpredictable. Even the best investors know this. With a solid strategy in place in a long time period, you can make a lot of money for yourself. Trying to time the market will drive you crazy.
6. New technology is never a good investment
Every decade comes with new technology. And as you can expect, new technology always attracts investors. But the initial excitement wears off, and then you are left with overpriced stocks that are crashing in price. Don’t get involved.
7. Beware the retail industry
It might surprise you to know that the industry with the most bankruptcies in the last 20 years is retail. That’s not to say that there aren’t good opportunities in retail, but you have to be careful.
8. Airline stocks are terrible
Ever since the airlines were deregulated in the 1970s, the industry has gone through a tumultuous time period where hundreds of airline stocks have gone bankrupt. It’s essentially a commodity business with poor profit margins. Stay away.
9. You aren’t a hammer, and stocks aren’t a nail
Once you’ve established a successful strategy or stock market idea, don’t go around trying to apply it to every situation. There’s no magic pill, and so you must always be humble and recognize the faults of any one idea.
10. Immoral management is a liability
Just ask Enron and Worldcom how immorality broke their businesses. At any sign of immorality from management, no matter how small, take the warning and run.
11. Overleveraged homes will break your bones
REITs can be great investments, but be careful with how much debt they carry on their balance sheets.
12. It just takes one apple to spoil the bunch
When investigating companies with fundamental analysis, it’s a good idea to distinguish the important ratios and hold strict to avoiding a stock that fails even one category.
13. Your investments should be a melting pot
Diversification is key.
14. Avoid a high sales multiple
The professional investors on shark tank prefer companies with low sales multiples. You should do the same. An extremely high P/S means you are paying too much.
15. Falling top line growth is not preferable
Top line growth is a great sign. It means that earnings is likely to be headed in the same way. Falling top line growth makes it that much harder to raise earnings.
16. Don’t overpay for stocks
Valuations are of ultimate importance. Subscribe to my free newsletter if you want to learn the key ones.
17. A negative shareholder’s equity is a huge red flag
A situation like this means that a company owes more than they own in assets. This is completely unsustainable, and a turnaround is unlikely. Run.
18. Avoid a high earnings multiple
The bubble stocks that destroyed investors during the dot com boom tended to have high earnings multiples. Always avoid these.
19. Negative annual earnings are a huge red flag
Of the 30 biggest bankruptcies of the last 20 years, the #1 most common characteristic of a company about to go bankrupt was negative annual earnings.
20. Avoid a high price to cash ratio
A high price to cash ratio means that a company is having trouble generating cash in its cash flow statement.
21. Debt to equity is the most correlated to bankruptcy
While negative earnings were most common in bankruptcies, high debt to equity ratios were most correlated. Meaning the higher the debt to equity, the greater chance of bankruptcy.
22. Total liabilities matter more than long term debt
Speaking of the debt to equity ratio, some investors calculate the “debt” portion with long term debt numbers. Don’t do this. Total liabilities create negative situations for companies, regardless if the debt is short or long term.
23. Financial banks are ridiculously risky investments
The debt to equity of financial banks tends to be 10x more than an average company. Why would an investor want to get involved with this much risk? Just look at that whole industry during the ‘08, ‘09 bear market. Bank stocks with good earnings saw their share price crash by 9/10ths or more.
24. Don’t buy a stock without a dividend
This goes without saying. A dividend provides compounding growth for your capital.
25. A large payout ratio is troubling
A payout ratio greater than 100% means that the company is paying more than it is making. This is unsustainable.
26. Growth is growth is growth
The rate that a company can grow its earnings is the most common way to evaluate its success. Make sure you are paying attention.
27. Growth after negative earnings isn’t real growth
The way that math works is that percentage changes can’t be calculated from an original negative number. If they are, they are inaccurate, so don’t use them.
28. Don’t buy on margin
Debt is dumb.
29. Keep it simple stupid
The most important stock market concepts can be understood by anyone. Debt and positive earnings, which is just revenue minus expenses, are of chief importance.
30. The market isn’t a casino, don’t play like it
Don’t get caught up with the flashing tickers. A good investment is boring to watch, like paint drying on a fence.
31. Foreign stocks come with additional taxes
Not only might taxes be different over there, but you’ll be taxed here in the U.S. as well.
32. Short term investing leads to higher taxes
Any investment sold before 1 year of holding is subject to short term capital gains tax, which is higher than long term capital gains tax.
33. Emotions are not your friend
Take emotions out of it as much as you can. I do this by incorporating a number based system.
34. There are no guarantees in the market
Which is why you must have risk management systems in place.
35. Will this company be around for my grandchildren?
Great question to ask for a long term investment.
36. Growth investing is really for “greater fools”
The greater fool theory depends on a greater fool buying the stock you bought at a higher price. This theory always breaks down at the end of a bull market.
37. Clicks aren’t earnings
Investors during the Internet bubble got tricked into thinking clicks matter for stock selection.
38. Invented metrics are extremely unreliable
And a completely idiotic way to invest. Mutual fund managers thought that the old fundamental metrics were outdated and useless during the Internet bubble. Until the bubble popped.
39. “Loss leader” is another term for bad investment
A company’s number one goal is to create profit. Period.
40. One man doesn’t create investment returns
Your company might have a charismatic leader, but that alone won’t create sustainable profits. A good business model trumps that.
41. Pessimism is usually overstated
Which creates opportunity.
42. Optimism is often irrational, and overstated
Which creates bubbles.
43. Bubbles are easy to spot, hard to avoid
Unless you are diligent with your research, and use the principles I share in my Value Trap Indicator book.
44. A company’s seductive story is dangerous
Stocks fly high from their great story. Unfortunately, they later crash once the story loses its allure.
45. The crowd isn’t right
Being right in the short term doesn’t make you a good investor. You must reject the crowd, it’s the only way to truly buy low and sell high.
46. Forecasts are rubbish
These are wrong way more than they are right. Nobody can predict the future.
47. The one thing you can control is the price you pay
Which is why value investing works so well. By creating a margin of safety and buying a company that is undervalued, you increase your chances of being right.
48. CNBC is hardly educational
It’s number one goal is to get more viewers, which will attract higher advertising profits. Remember that.
49. Beware your own tricky perceptions
You might be more biased than you realize. Just because someone has a New York accent or dresses in a fancy suit doesn’t mean he’s necessarily credible to give you stock market advice.
50. Don’t succumb to confirmation bias
Confirmation bias is a natural human reaction to find research that confirms our original opinion. This can be very dangerous if you aren’t aware of it when selecting stocks.
51. A tree doesn’t grow overnight
So stop trying to make milllions with one stock pick.
52. “Me too” marketing is not good investment advice
Stay clear of the investing experts who are clearly preying on the uninformed.
53. Not many financial professionals have aligning interests
Take everyone’s opinion with a grain of salt. The adviser who tells you he is working for free is going to try and sell you into a company he has a financial relationship with.
54. High management bonuses aren’t investor friendly, usually
Unless the company is doing really, really well… high management bonuses are a bad sign. The money that should be invested into creating more profit might be splurged away at parties.
55. The numbers tell you much more than annual report pictures will
Don’t trust the flashy pictures in an annual report. If anything, they might be trying to distract you from the real truth (the numbers).
56. High frequency trading isn’t your problem
Day trading is for suckers. A few .00005% of a percent doesn’t hurt you if you’re a long term investor.
57. The market doesn’t care how much effort you put in
Don’t try to “make up for lost time” by taking more risk in the stock market. You almost always won’t be rewarded.
58. More money is the best way to make more money
Everything starts at step one with your personal finances. Oftentimes, a 1% over-performance in the markets isn’t as meaningful as more money saved.
59. Consistency is king
I’ve talked about the importance of dollar cost averaging before. It just might be the single most important stock strategy out there.
60. A falling knife is deadly
Buy low means buying companies that are out of favor. Beware the falling knife, which is just a company heading straight down to bankruptcy.
61. Even rational investment theses are subject to irrationality
Similar to the point made before. You can’t know what’s going to happen in the markets so be diversified.
62. Don’t sell too early
Just because a stock has hit your idea of intrinsic value doesn’t mean it could double or triple from there. Use a trailing stop to lock in your gains and let your winners run.
63. Over-diversification is detrimental
You’re missing out on over-performance opportunities when diluting yourself too much. Try to stay within 15 – 25 stocks, with 20 stocks being the ideal.
64. Stocks are more than just charts
The purchase of a stock is part ownership of a business.
65. Newspapers are useless
It’s not information, it’s noise.
66. News articles are always backward looking
I gained so much more clarity with my investing when I stopped looking for the news explanations. Notice that the results are always different, yet there’s always an explanation.
67. Expect the unexpected
Risk management, risk management, risk management.
68. If it looks too good to be true, it is
This is good advice not only in the market but in real life as well. That stock paying a 13% dividend probably is cutting that dividend soon.
69. Broke people always have an opinion
I just love hearing broke people say what they think I should do with my money. NOT!
70. Don’t fall in love with a company
Again, keep your emotions out of it. Establish rules and stick to them.
71. The management always think highly of themselves
Everyone is self motivated, we all think we are better than the average. You might think your company is the best, but that doesn’t ensure it will be a good investment.
72. Scuttlebutt is useless
How can talking to management be helpful to evaluating stocks when every management thinks they are superb? You don’t have to have connections to succeed in the stock market because scuttlebutt is useless.
73. Past performance is useful to a point
Past performance doesn’t guarantee future results. Remember that.
74. You can’t stick your head in the sand
Finances have a funny way of wreaking havoc when unattended.
75. There is no magic pill
Stop looking for it. Nothing beats patience and prudence.
76. Just read to succeed
The secrets to success are in very many books. But most people are too lazy to read them.
77. The lottery is for poor people
As is the lottery mentality. The only people on the Forbes 500 who got there by accident were born into it.
78. Analysis paralysis can only be fixed by action
You can consume all the information you want, but nothing will move the needle until you actually buy that first stock.
79. Trust in man’s desire to consume
The doom and gloomers will always try to scare you into buying their products. Just trust that man will always be buying from man, and so the stock market will always exist. Which means your chances are good investing in the stock market for the long term.
80. Be prepared for lower prices than you expect
Stocks seem to always rise higher than you expect, and fall further than you expect. I can’t remember which famous investor said that but it’s true. Just look at the surprise with crude oil.
81. Overconfidence is a sure way to fail
Overconfidence leads to poor risk management, which leads to fear… and fear leads to anger, anger leads to hate, hate leads to SUFFERING.
82. Fear can be crippling, so learn how to conquer it
The only thing we have to fear is fear itself. My whole purpose in my latest book was to show people how to conquer fear with their investments, by describing exactly how to avoid bankruptcies.
83. A management who rests on their laurels will be defeated
Look no farther than Blockbuster who dominated movie rentals for decades, or Barnes and Noble who didn’t take Amazon seriously.
84. A company with poor marketing will fail
Companies need marketing to sell their products. They need sales to survive.
85. A terrible business can survive a long time before bankruptcy
Keep that in mind so you don’t buy subpar stocks.
86. Extreme recovery stories aren’t great at making you money
Stocks with negative earnings should be avoided at all costs. The off chance of an extreme recovery isn’t worth the monumentous risk.
87. Accounting scandals can’t be avoided, but poor financials can
A company like Nortel had poor financial numbers long before their accounting issues came to light.
88. Bad business models always show in the numbers
The numbers never lie. Just learn how to read them. It’s not hard, it’s what I teach.
89. The best stock in a bad industry is still a bad stock
As record stores have been steadily dying, does it really matter if you own the best of the worst?
90. Beware the “rule of three”
Mature markets tend to all look the same after a while. Check out the article I’ve written about the rule of three.
91. DGI (dividend growth investing) isn’t invincible
A company that has grown its dividend consistently is usually a good investment. Usually. Consider the other valuations as well.
92. A young company can die as quickly as an old company
MF Global went bankrupt after only 4 or 5 years.
93. Stock splits don’t mean anything about a company’s performance
Stock splits are done to try and attract more investors. A bad stock could split their shares just like a well performing one could.
94. Earnings can be manipulated much easier than revenue
There’s so many factors into calculating earnings, which is why it’s so important to also consider P/S.
95. Academic theories don’t play out in the real world
Which is why academics sit in their ivory towers and not on piles of cash. Learn the theories but with skepticism.
96. Remember, the tortoise beats the hare
This parable works with success, business, and the stock market.
97. You don’t have to reinvent the wheel
Did you know that the top investors of the past few decades have used a similar approach that top investors used during the 40’s? It’s called value investing, and it’s based on using important valuations.
98. Losses hurt much more than gains
A 75% loss takes a 300% gain just to break even. That’s just how the numbers work out. So avoid losses.
99. The biggest problem is the idea that average people can’t do well in the stock market
Finally, this last point is my biggest beef. You can do just as well as the experts, you just have to learn a few simple concepts. Teaching you is the single purpose of my blog.
**Investment Checklist: 99 Problems to Avoid**
**All Rights Reserved. Investing for Beginners 2015**