Methods
for Avoiding “Money Trap” Stocks
By
Anthony Rhodes
There
are fewer items more enticing for an investor than the prospect of
purchasing an underperforming stock just prior to it dramatically
moving towards the upside. Discovery of these “hidden gems” are
the stuff of legend, and can instantly catapult an average or dreary
portfolio to astronomical
heights, while
placing
a vainglorious feather
in the cap of the investor that discovered it, in the
process.
The
search for these incognito
treasures
can encompass the full spectrum of the market, ranging
from
small cap to large, growth stocks to income, and all sectors in
between. Truthfully,
it is this
elusiveness
that makes their discovery such
a
difficult goal
to
attain,
and contributes
overwhelmingly
to
their eventual
finding
being
such
a point of boisterous
jubilation.
However,
during
this pursuit, we can sometimes
be
deceived into believing that certain stocks, which look and act
like these gems, are identical to
them, when
in fact, they
are nothing
more
than their
exact
opposites.
These
“money trap”
stocks will be our topic for this week, as
I explain how to differentiate the
genuine
from the counterfeit,
and protect your portfolio from the
consequences
created by their
deceptive appearances.
At
our finale, you will hopefully learn the same valuable lesson which
dumbfounded
the
nugget prospectors of the Old West, and
eventually reduced
their livelihood
to financially
ruinous outcomes,
and
sometimes,
even
suicidal
ends.
I
am, of course, speaking of the
age old lesson that
all
that glitters
is not gold.
The Alluring Shimmer of the Blue Chip
Of
all the stocks likely to tempt
an investor into taking a gamble on a future upswing, none are more
compelling than blue chips. These large, household names have
a long history of reliable growth, and can prove simply irresistible
to
some,
as they view their underperformance as a temporary ordeal, and
undoubtedly
certain
to take a positive turn for the better. It
is this logic which makes their
situation paradoxical; how can such a large company trade at such a
competitive discount to the overall market? The answer lies in this
simple idiom:
while the stock market exists
in the present, its prices are generally
reflective
of the future. When blue chip stocks trade at a discount, analysts
have deemed that the company’s future earnings are likely
to
be
sub-par,
and that its
current price is more
indicative
of the earnings which it is likely to produce. The
overriding lesson being presented here
is
simply to
always beware of the underperforming blue chip that entices you with
future promises of golden
returns.
The Little Nugget That Could
The opposite of this spectrum includes taking a bet on the small, under covered penny stock, whose focus is a relatively obscure section of a certain field. We’ve all heard grandiose stories about the once unknown company which catapulted to prominence, and these tales stoke the flames that we, too, can produce similar results, if we simply find the ideal candidate, at the correct time. Oddly missing in these stories, of course, are the untold number of investors who lost millions of dollars chasing the other penny stocks, over the same period of time, which fizzled into oblivion, and left them licking their proverbial wounds in the aftermath. There’s a good reason why penny stocks are categorized as such, and finding that one winner amongst a sea of failures is tantamount to winning the lottery. I understand that the risk/reward ratio lies in favor of the investor, but those monies could be much better spent on other candidates with cleaner balance sheets, and much clearer paths to success.
Both within the stock market and beyond it, whenever we go in pursuit of life’s treasures, we also run the risk of finding ourselves deceived by imitations of the authentic. Our desire to seek the rewards which provide our lives with joy and meaning, exposes us to falsities which can thwart our powers of observation, and trick us into believing that they are, indeed, the prize which we have sought all along.
These hollow illusions will succeed in their task, only if we refuse to look beneath the veneer of the spurious images on which they project. For when we do, their fragile disguises are finally exposed to the light of day, and we can then confidently marshal on in pursuit of the genuine article.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )
Both within the stock market and beyond it, whenever we go in pursuit of life’s treasures, we also run the risk of finding ourselves deceived by imitations of the authentic. Our desire to seek the rewards which provide our lives with joy and meaning, exposes us to falsities which can thwart our powers of observation, and trick us into believing that they are, indeed, the prize which we have sought all along.
These hollow illusions will succeed in their task, only if we refuse to look beneath the veneer of the spurious images on which they project. For when we do, their fragile disguises are finally exposed to the light of day, and we can then confidently marshal on in pursuit of the genuine article.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )
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