Managing Risk -- Stock Trading And Investment (15)
In selecting companies listed in the stock market, it is imperative to evaluate the risks first to weed out the bad ones. Many people are only interested in future potentials, unaware of their blind spots about risks.
Some Risky Industries
Despite growing traffic, the airline industry is the most risky, especially US domestic airlines. Many external factors are beyond their control but greatly impact on their bottom line. These factors include: price of oil, cutthroat competition, huge overhead and maintenance costs, weather conditions, terrorism, etc. Even big names have collapsed such as Pan American and Eastern. The rest are struggling to survive everyday.
The US automobile industry lacks leadership, vision and management. It suffers from rising labor and health care costs. Over the last 40 years, imports have consistently eaten away their market shares. Two oil crises have hit in early and late 1970s, inflicting heavy damage. Sadly, they still have not learned a lesson to produce better fuel-efficient cars or hybrids. The present oil crisis may finish them off barring a takeover or government bailout.
The restaurant business is tough. What makes it so tough is the ease of entry and intense competition. It requires creative efforts to manage fresh raw materials, low costs, and changing consumer tastes. There are of course some bright spots where a restaurant manages to find a niche to stand out against the rest. However, the risk is too high in general.
The retail business is tough due to the same reason as restaurants. Only the large and high-end retailers can survive. The rest just come and go.
Poor Judgment
Picking a bad stock is usually the result of bad judgment. We don't want to admit it, and we won't improve as a result. The following factors contribute to poor judgment:
We happen to have read a report with impressive statistics and graphs. It lights a fire within, and we rush out to buy the stock the next day. On the other hand, we may have read so much about one company or one industry that blinds us to everything else. This is a case of informational intoxication.
Our objectivity is always compromised if we work in a particular company or industry. We think we know it all because we are the so-called insiders. If that is the case, why so many employees cannot foresee their own layoff when their company is teetering on the brink? How many Enron employees were stuck with their company's shares when Enron finally collapsed?
People like to get fascinated with big names or icons such as Disney, Coca-Cola, Apple, Boeing, Google, Ebay and so on. Those companies have been very successful in establishing a powerful brand name. When their stocks fall, brand names will mean nothing to you. Here are some of the recent failed brands: AIG, Lehman Brothers, and Bear Sterns. There are some more in troubled waters: Morgan Stanley, General Motors, Ford and Chrysler. Do you remember that IBM almost went over the cliff in early 1990s and Apple in mid 1990s? Names dont matter much. Companies just come and go.
Most investors use a narrow or technical definition to assess the potential of a company such as product, brand, market share, profit, management style, etc. Those are only part of the big picture known as market fundamentals. They are all interrelated. Furthermore, they are all changing on a daily basis. You need to stay tuned and keep an open mind. The big picture is never clear. You can only feel if the market fundamentals are favorable or not. Most stocks rise in favorable conditions, but many go counter to the trend.
Most investors think that the stock price rises when a company is doing well. This is often not true. The price goes up for only two reasons. First, the big players are pushing it. Second, the herd just follows after seeing it. The big guys have a good reason for pushing it. They have already made a lot of purchases at lower prices. They want to cash out at a higher price. They have to push up the price to seduce participation from the herd. Of course, we never know how many months or days it will take for the big players to reach their target levels. It all depends on how they view the situation. Since they are the real insiders, their view is necessarily different from ours. We should never guess what they think. Thats is the worst mistake we can possibly make. We should try to buy when the herd begins to rush in. Conversely, we should try to sell when the herd starts the stampede.
For further information, please email to stockfessor@comcast.net
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