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Investing
in a stock that
has been
spotlighted in the
news recently.
Many
individuals are
attracted to stocks
that have received
substantial media
coverage. Often,
however, being a
media star drives
up the stock price
significantly. At
this point you are
buying a stock with
a price that already
embodies great expectations,
with all the possible
and some improbable
good news already
incorporated into
the stock price.
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Hanging on to
a sagging stock
waiting for
the price to
bounce back
so you can "get
even and get
out."
Some
investors go
to great lengths
to avoid recognizing
a loss that
has already
occurred. This
may help your
ego, but it
won't help your
performance.
People tend
to have a strong
emotional aversion
to regret which
often causes
investors to
maintain the
status quo and
avoid taking
positive steps
to remedy a
particular situation.
Fight the tendency
to take comfort
in the fact
that you only
have a "paper
loss." Holding
on to a stock,
no matter what
the return or
prospects, in
the hopes of
selling at the
original purchase
price and thereby
"getting even"
may entail a
great opportunity
cost. Instead,
always evaluate
your current
holdings relative
to other potential
investments,
and view realized
losses as an
opportunity
to protect investment
gains from taxes.
Investment discipline
can help keep
emotions in
check. By writing
down the reasons
for purchasing
a stock and
re-evaluating
their validity
over time as
dispassionately
as possible,
investors can
force themselves
to maintain
a selling discipline.
If the reasons
for purchase
no longer hold
and the share
price indicates
deteriorating
fundamentals,
admitting a
mistake may
often be the
prudent thing
to do.
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Falling
in love with your
stocks.
People
have a tendency
to place a higher
value than the overall
market on items
that they own. The
implication of this
trait is that sellers
typically want more
money for an item
than it will actually
fetch in the market.
In effect, the experience
of ownership heightens
value in the eyes
of the owner. Be
realistic about
the price you'll
accept to part with
your stock, otherwise,
you may not get
rid of it. Seek
out contrary opinion.
Research doesn't
stop when a purchase
is made. Strive
to identify your
mistakes as early
as possible and
take pride in the
ability to do so.
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Buying a stock because
it recently had a
substantial drop in
price.
"Bottom fishing,"
the practice of buying
stocks that have fallen
considerably in hopes
of getting them cheaply,
can be quite hazardous
to your wealth. Some
investors assume that
lower prices translate
into bargains. Most
big price drops are
the result of changing
circumstances at the
firm. Make sure you
know why a price drop
has occurred before
jumping to conclusions
about undervaluation.
If you have evaluated
a stock and determined
that you would like
to accumulate a position,
then you can time
your buys to take
advantage of the ebbs
and flows in the market
and price weakness
in the stock when
it goes below your
buy price. If, on
the other hand, a
sharp price decline
lies behind the decision
to buy and a recent
higher price looms
large in the stock's
initial attraction,
beware-the odds are
against you. Also
be wary of buying
right after the announcement
of a large negative
earnings surprise-when
announced earnings
are below earnings
consensus estimates.
The stock price adjustment
from negative earnings
surprises often continues
for quite some time,
perhaps a year for
a serious surprise.
And the price adjustment
is greater for negative
surprises than for
positive surprises.
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Buying a stock
solely because
you like the product
the firm makes.
The product may
be great but the
firm may not.
For instance,
the product could
be successful
but comprise only
a small portion
of firm sales.
Conversely, the
product may be
wonderful from
a consumer viewpoint
but a profit failure
for the firm.
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- Buying
the stock of a
great company
without considering
its price.
Good companies
make for good
stocks when they
can be purchased
at a good price.
Just because a
company is well
run, profitable,
competitive, and
possesses good
prospects going
forward does not
mean it is a good
investment at
any price. Stock
prices of attractive
companies can
get ahead of the
company and reflect
all possible good
news that may
come out of a
company and then
some.
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Chasing
after initial public
offerings.
Studies have determined
that buying at the
offering price of
an initial public
offering (IPO) produces
excess returns,
while buying a new
offering after it
begins trading in
the market is more
likely to produce
negative returns.
Excess return is
the return above
the market after
adjusting for the
risk of a stock.
Unfortunately, these
findings are more
useful for institutional
investors than for
individual investors,
since most initial
public offerings
are offered first
to a dealer's largest
clients, who quickly
snap up the best
offers, leaving
behind those that
are less desirable.
Without clout as
either an institution
or a large active
client, worthwhile
initial public offerings
are virtually impossible
to acquire at the
offering price.
If you can get it
at the offering
price, you probably
shouldn't buy it;
if you can't get
a new offering at
the offer price,
wait a year or so
before you buy
it in the secondary
market-provided
it still has any
appeal.
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Paying too much
for growth.
Growth investors
are willing to pay
up for high historical
growth combined
with high forecasted
growth. Excess returns
are not normally
achieved by simply
seeking out companies
with high historical
earnings growth
or consensus earnings
forecasts. Forecasts
of extremely high
growth rates are
unlikely to be met
over the long run,
and negative earnings
surprises normally
lead to not only
sudden prices slides
but often continued
weakness over prolonged
periods as well.
Interestingly, even
if high growth forecasts
are just met, stocks
tend to decline,
and when high forecasts
are exceeded by
actual earnings,
the price rise is,
on average, moderate.
To succeed, you
must be able to
nimbly jump on and
off various stocks
as new information
flows to the market.
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Buying the stock
of a company when
you are unable to
directly form a
judgment on the
prospects of the
firm.
Some companies have
products and exist
in markets that
are technically
complex and therefore
difficult to evaluate
by individuals not
familiar with the
area. If that is
the case, you may
be relying on the
opinions of others
to form your investment
decision. Instead,
stick to more familiar
territoryInvesting
in anything you
don't fully understand.
Make sure you know
the
risks and the potential
returns as well
as the terms and
conditions of the
investment. Know
what will affect
the value of your
investment and the
likelihood of changes
in value.
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Seeking
out high dividend
yielding stocks
in the belief that
the higher the dividend
yield, the better.
Many investors consider
high dividend paying
stocks to be relatively
conservative investments.
However, firms with
extremely high dividend
yields have them
because they have
to-it is the market's
way of telling investors
that the risk of
the dividend being
cut or eliminated
is great. Make sure
you evaluate the
firm's dividend-paying
history, and future
prospects, when
considering high
dividend yielding
stocks.
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Buying
a low price-earnings
ratio or low price-to-book-value
ratio stock without
knowing why the
ratio is low.
Contrarian investors
seek stocks with
low price-earnings
ratios or low prices
relative to book
values in the belief
that the market
has misjudged the
future prospects
of a firm. However,
there are risks
to being a knee-jerk
contrarian investor.
By not seeking out
the factors that
pushed the price-earnings
ratio down or the
stock price below
book value, you
may end up investing
in a mediocre firm
in an industry in
long-term decline.
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Expecting a reverse
stock split to single-handedly
turn around a company's
stock price direction.
Contrarian investors
seek stocks with
low price-earnings
ratios or low prices
relative to book
values in the belief
that the market
has misjudged the
future prospects
of a firm. However,
there are risks
to being a knee-jerk
contrarian investor.
By not seeking out
the factors that
pushed the price-earnings
ratio down or the
stock price below
book value, you
may end up investing
in a mediocre firm
in an industry in
long-term decline.
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Best of Luck!
From Bookprofit.com
Team.
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