Saturday, November 11, 2017

Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons.....

Courtesy: Investopedia

Most basic articles on investing advise having a diversified investment portfolio. Diversifying investments is touted as reducing both risk and volatility. However, while a diversified portfolio may indeed reduce your overall level of risk, it may also correspondingly reduce your potential level of capital gains reward. The more extensively diversified an investment portfolio, the greater the likelihood it, at best, mirrors the performance of the overall market. Since many investors aim for better than market average investment returns, they may wish to revisit the issue of diversification versus concentration in their portfolio choices.

Ways to Diversify a Portfolio

There are a number of ways to attain some level of diversification. One is simply company diversification, which is owning stock in more than one company. A portfolio can also be industry diversified. Owning stock in both a banking company and an insurance company is more diversified than simply owning two bank stocks. Further diversification can be achieved by investing in more than one market sector. Another means of diversification is to own stocks of companies with different levels of market capitalization, from small- to large-cap stocks. Portfolio diversification can also be achieved by investing globally rather than just in domestic stocks. Investing in different asset classes, such as stocks, bonds and futures, also creates diversification. Finally, investing choices based on varying trading strategies, such as growth investing and value investing, also provide diversification.
The real question for investors is to what extent they should diversify their investment portfolios, and the answer is that each individual investor should largely be driven by his personal investment goals, level of risk tolerance and choice of investment strategies. Investors should consider the relative advantages and disadvantages of diversification within that personalized investment framework.

Advantages of a Diversified Portfolio
Diversification reduces an investor's overall level of volatility and potential risk. When investments in one industry, market sector or asset class perform poorly, other investments in the portfolio with a negative correlation to the poorly performing investments should perform relatively better and at least partially offset losses and reduce the portfolio's overall volatility. Diversification may also open up additional profit opportunities. For example, an investor who chooses to diversify his portfolio with investments in foreign stocks may find he has invested in the stocks of countries experiencing economic booms, and those stocks produce large gains at a time when the performance of domestic stocks is mediocre to poor.
Disadvantages of Increasing Diversification
The disadvantages of diversification are less publicized, and therefore less well known, but the fact is diversification can also have adverse effects on an investment portfolio. Overly diversifying an investment portfolio tends to reduce potential gains and produce only, at best, average results. If your investment portfolio contains five stocks that are performing wonderfully, but 45 others that are not doing well, those stocks may substantially water down the gains realized from your best stock selections.
Another problem with aiming for broad diversity is it may require extra transaction costs to re-balance your portfolio to maintain that level of diversification. A widely diversified portfolio with a lot of different holdings is generally more trouble to monitor and adjust since the investor has to stay on top of so many different investments. Diversification can even increase risk if diversifying leads an investor to invest in companies or asset classes that he knows little or nothing about but have been added to a portfolio solely for the purpose of achieving diversification.
Advantages of Concentrated Portfolios
One of the advantages of a more concentrated portfolio is that while it does increase risk, it also increases potential reward. Investment portfolios that obtain the highest returns for investors are not typically widely diversified portfolios but those with investments concentrated in a few industries, market sectors or asset classes that are substantially outperforming the overall market. A more concentrated portfolio also enables investors to focus on a manageable number of quality investments.
The Bottom Line
The best path for an investor may be to aim for only a modest amount of diversity while putting his primary focus, not on diversification, but on selecting high-quality investments chosen in accord with his preferred investment strategy of growth investing, income investing or value investing; his personal risk tolerance level; and his overall investment goals. While some level of diversification should be a consideration in constructing an investment portfolio, it should not be the driving concern. The primary focus of an investment portfolio should always be on putting together a portfolio designed to best meet the personal investment goals and financial needs of the individual investor.



Saturday, October 28, 2017

An Introduction To Small Cap Stocks



Courtesy : Investopedia

Small cap stocks have a bad reputation. The media usually focuses on the negative side of small caps, saying they are risky, frequently fraudulent and lacking in quality that investors should demand in a company. Certainly these are all valid concerns for any company, but big companies (think Enron and Worldcom) have still fallen prey to issues of internal fraud that virtually destroyed shareholder interest. Clearly, company size is by no means the only factor when it comes to investors getting scammed. In this article we'll lay out some of the most important factors comprising the good and the bad of the small-cap universe. Knowing these factors will help you decide whether investing in smaller-capitalized companies is right for you.

Background
Before we get into the pros and cons of small caps let's just recap (no pun intended) what exactly we mean by small cap. The term refers to stocks with a small market capitalization, between US$250 million and $2 billion. Stocks with a market cap below $250 million are referred to as micro caps, and those below $50 million are called nano caps. Small-cap stocks can trade on any exchange although a majority of them are found on the Nasdaq or the OTCBB because of more lenient listing requirements.

It is important to make the distinction between small caps and penny stocks, which are a whole different ball game. It is possible for a stock to be a small cap and not a penny stock. In fact, there are plenty of small caps trading at more than $1 per share, and with more liquidity than the average penny stock.

Why Invest In Small Cap Stocks?
When you are eyeing small cap stocks, a number of positive factors weigh against some of their negative attributes. Below we have outlined three of the most compelling reasons why small caps deserve representation in many investors' portfolios.

1. Huge growth potential
Most successful large cap companies started at one time as small businesses. Small caps give the individual investor a chance to get in on the ground floor. Everyone talks about finding the next Microsoft, Wal-Mart or Home Depot, because at one point these companies were small caps - diamonds in the rough if you will. Had you possessed the foresight to invest in these companies from the beginning, even a modest investment would have ballooned into an extravagant sum.

Because small caps are just companies with small total values, they have the ability to grow in ways that are simply impossible for large companies. A large company, one with a market cap in the $1 billion to $2 billion range doesn't have the same potential to double in size as a company with a $500 million market cap. At some point you just can't keep growing at such a fast rate or you'd be bigger than the entire economy! If you're seeking high-growth companies, small caps are the place to look.

2. Most mutual funds don't invest in them
It isn't uncommon for mutual funds to invest hundreds of millions of dollars in one company. Most small caps don't have the market cap to support this size of investment. In order to buy a position large enough to make a difference to their fund's performance, a fund manager would have to buy 20% or more of the company. The SEC places heavy regulations on mutual funds that make it difficult for funds to establish positions of this size. This gives an advantage to individual investors who have the ability to spot promising companies and get in before the institutional investors do. When institutions do get in, they'll do so in a big way, buying many shares and pushing up the price.

3. They are often under-recognized
This third attribute of small caps is very important. What we are saying here is that small caps often have very little analyst coverage and garner little to no attention from Wall Street. What this means to the individual investor is that, because the small cap universe is so under-reported or even undiscovered, there is a high probability that small cap stocks are improperly priced, offering an opportunity to profit from the inefficiencies caused by the lack of coverage devoted to a particular area of the market.

The Drawbacks to Small Cap Investing

As with any investment, small caps are not without inherent drawbacks. These include:

1. Risk
Despite the fact that small caps demonstrate attractive characteristics, there is a flip side. The money you invest in small caps should be money you can expose to a much higher degree of risk than that of proven cash-generating machines like large caps and blue chips.

Often much of a small cap's worth is based on its propensity to generate cash, but in order for this to happen it must be able to scale its business model. This is where much of the risk comes in. Not many companies can replicate what U.S. retail giant Wal-Mart has done, expanding from essentially a mom-and-pop store in Arkansas to a nation-wide chain with thousands of locations. Small caps are also more susceptible to volatility, simply due to their size - it takes less volume to move prices. It's common for a small cap to fluctuate 5% or more in a single trading day, something some investors simply cannot stomach.

2. Time
Finding time to uncover that small cap is hard work - investors must be prepared to do some serious research, which can be a deterrent. Financial ratios and growth rates are widely published for large companies, but not for small ones. You must do all the number crunching yourself, which can be very tedious and time consuming. This is the flip side to the lack of coverage that small caps get: there are few analyst reports on which you can start to construct a well-informed opinion of the company.

And because there is a lack of readily available information on the small-cap company, compared to large caps like GE and Microsoft which are regularly covered by the media, you won't hear any news for weeks from many smaller firms. By law these companies must release their quarterly earnings, but investors looking for more information will be hard-pressed to find anything.

The Bottom Line
There is certainly something to be said for the growth opportunities that small cap stocks can provide investors; however, along with these growth opportunities come increased risk. If you are able to take on additional levels of risk relative to large-cap companies, exploring the small cap universe is something you should look into. Alternatively, if you are extremely risk averse, the rollercoaster ride that is the stock price of a small cap company may not be appropriate for you.

Saturday, October 14, 2017

WHAT IS TURNAROUND INVESTING ?

Courtesy : internationalbanker.com



Value investing is one of the most common approaches to investment, a strategy that involves picking stocks based on their intrinsic values. Should a company’s value—as measured through a range of methods—be considered worth more than the current price of the stock, the company is likely to be deemed as being undervalued and therefore ripe for a recovery. Such stocks are highly sought after by value investors, of whom some are the most respected investors in the industry, such as Warren Buffett and Seth Klarman.
One of the main facets of value investing is turnaround investing. This involves taking a position in a stock that has fallen out of favour—often due to bad news initially associated with the company—and is therefore not perceived by the majority of investors to be a worthwhile consideration. Profound financial and operational issues are likely to have severely dragged down the company’s stock price and its business model. A turnaround stock, however, will continue to have a higher intrinsic value than asserted by the majority. This means that it remains an attractive investment option as its stock price is likely to recover—or “turnaround”—in order to reflect this true value.
Companies that are in need of a turnaround have often suffered a consistent decline in their financial results, which in turn has resulted in a loss of investor confidence and ultimately a collapse in their share prices, as positions are sold en masse. This leads to companies trading at heavy discounts that eventually become ignored by the majority—but noticed by value investors. If the company announces efforts to turn the company around, it is likely that improved financial performance will follow. Such an announcement, therefore, often results in an increased stock price. However, it is also the case that management realises that positive change doesn’t transpire as quickly as intended, if at all, which is why it is worth waiting to see if such pronouncements translate into visible, sustainable improvement in the company’s underlying fundamentals. If the factors that caused the company’s initial demise appear to be duly addressed, then an investor can be more assured that a successful turnaround is imminent.
Indeed, a turnaround often involves preventing the company’s deterioration by implementing stabilisation measures, through cutting costs, selling non-vital assets, divestment or even changing the entire focus of the business or the way it markets its products. It may even involve filing for bankruptcy in order to alleviate some of its debt burden. Many US coal companies, for example, have filed for bankruptcy to eliminate much of the debt they amassed when coal prices were at all-time highs, at the beginning of the decade. Whether they are successful in posting comprehensive recoveries, however, remains to be seen.

Investing in turnaround stocks can often be a risky strategy, given that not all companies that implement recovery measures will rebound. Indeed, many will continue on an inexorable decline. Many companies have long-term management woes, issues with product marketing, are in cyclical decline, or are facing legal action. This means that repairing the company’s balance sheet is only one measure required for the stock to rebound. Management may have to be overhauled, costs may need to be reduced, new products may need to be developed, and lawsuits may require settlement. Moreover, investing in turnaround stocks invariably involves going against the grain and being a contrarian in relation to the majority of the investment crowd. Investors feel reassured that they are making the right decision when others are doing the same. With turnaround stocks, however, the majority ignore the true value and remain focused on news associated with the company’s fall from grace. Therefore, investing against the consensus view generally requires a degree of independence, as well as discipline in staying true to the company’s valuation metrics.

There are a number of ways to measure a stock’s valuation, including the price-to-earnings ratio (P/E) and the price-to-book-value ratio (P/BV), which involve examining the company’s earnings and debt levels and comparing them to its stock price. Asset-based valuation is also a popular method to determine intrinsic value, which essentially involves calculating the difference between a company’s assets and its liabilities. Different parameters provide different valuations, which makes it wise for the investor to calculate true value using a range of methods.
For those willing to perform a more detailed analysis of the company’s value, investment opportunities can arise as the true value eventually causes the stock price to rebound. This may require obtaining information on the target company that is difficult to come by. The benefit that arises from this method, however, is that because the stock price has already fallen substantially, any further “bad news” can often be deemed as having been “priced into” the stock value with the assumption that the majority of investors have effectively written it off.

An example of the emergence of turnaround stocks can be seen in the widespread collapse of global equity markets during the global financial crisis of 2007-09. As investors panicked, stocks were sold across the board. This resulted in many stocks—and indeed, entire sectors—falling out of favour with the main investment crowd. As such, several companies with strong fundamentals presented investors with attractive buying opportunities, given that their true values remained relatively strong. Given that global equities have largely been suffering from a bear market in 2016’s first quarter, understanding the turnaround concept remains just as important today for the value investor looking to unearth hidden gems. 

It is also useful to have an exit strategy with potential turnaround stocks, given the risk posed to the investor of the stock continuing to decline. This makes exiting such a position a much more subjective process as compared with other stocks. Therefore, it remains important to continue monitoring the measures taken by the company to improve its business, how upbeat and optimistic the management has remained, and the price of the stock in comparison to its industry rivals.

 Turnaround investing may lose investors a sizable amount of capital if the company cannot complete the intended turnaround. However, if it works, significant upside will emerge as the stock rebounds.


Saturday, October 7, 2017

PLEASE NOTE ...

Receiving lot of queries regarding my Facebook account . Please note that, I have no active Facebook account to recommend stocks  currently and not recommending stocks through anyone's Facebook account.

Saturday, September 30, 2017

RAMKY INFRASTRUCTURE LTD -UPDATE

Ramky infrastructure is one of my biggest failures , suggested @ Rs.280  came down to Rs. 23 and currently trading around Rs.97.For the past many years company's performance severely affected in tandem with overall performance of the industry. It is clear from recent balance sheet that company taking sincere efforts to reduce debt and came back to business. In a  positive development, today company informed its decision to allot 1.2 Cr warrants ( to be converted into shares) at a price of Rs.101. Along with  promoters, Aadi financial advisors LLP ( an entity related with well known Bhanshali family) participating in this preferential allotment. I strongly believe, company now at an inflection point and those invested earlier will not regret and hope their patience will pay in the years to come.

Link to today's Announcement HERE


Disc: Holding shares , hence my views may be biased

Monday, June 12, 2017

How to balance fear & greed when stocks are at their peak...

Courtesy : Economic Times
 The domestic equity market is on a roll with the benchmark indices currently hovering at all-time highs. The highlight of the current rally is undoubtedly the active participation of domestic institutional investors (DIIs), who, along with foreign investors, have collectively invested Rs 84,793 crore (year-to-date) in domestic stocks for the year till May 31, 2017. (Source: Sebi)

Though it’s heartening to see retail investors embrace financial products, especially invest via the SIP route, now is the time to take a look at one’s portfolio. Historical pattern suggests whenever the market rallied on account of increased liquidity, it has always turned volatile in the short run.
From a valuation perspective too, the market is no longer cheap. For example: the trailing price-to-earnings (PE) multiple for the S&P BSE500 index is trending above its long-term average with more than 25 per cent of its constituents trading at 40 times their trailing 12-months earnings, which is the highest ever for these names. (Source: BSE)

In such interesting times, it is imperative for investors to revisit some of the investment fundamentals; the important one being striking the right balance between greed and fear while investing. It is always better to exercise caution than be sorry and regret later, particularly, when equity prices are soaring at an all-time high. This rally is happening especially at a time when earnings are yet to catch up.

Over the past three years, India Inc’s earnings growth has not lived up to expectations due to multiple factors. However, going forward, this landscape is likely to improve given the positive macro-economic factors and a steady recovery in the economy. Also, the positive effect of the recent government reforms is likely to further help the recovery process.

Once the earnings growth materialises, there is a possibility that valuations may get realigned with historical valuations.

As Charlie Munger, American investor, businessman, and well known philanthropist, aptly said, “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”
When the market has been on a roll, investors often tend to seek more gains from their investments. With the market inching upward to new all-time highs, investors generally tend to become greedy expecting further gains. This may not necessarily be the right move and calls for rebalancing of portfolio.

As the value of the equity component of your portfolio goes up, your original balance can get skewed. However, investors should always keep in mind that no asset class will move in one straight line, be it upward or downwards for a long time. This holds true, especially for financial assets, as the volatility is more pronounced in them.
At this point, a retail investor should ideally take a hard look at one’s portfolio. With the rise in the market, the portfolio value may have swelled and one may be tempted to make fresh investments to capture most of the opportunities offered by the market.

But this is the time one has to be cautious and fortify the gains. Given this objective, the right thing to do for retail investors would be to invest in dynamic asset allocation funds/ balanced advantage category of funds. These funds invest in equity or debt as per the attractiveness of that particular asset class and dynamically manage the same. When equities are cheap, the fund allocation towards equity increases in order to tap the available opportunities and vice-versa.

The construct of these funds ensures that an investor has exposure to both debt and equity asset classes within a single fund. The matrix used to arrive at the proportion is generally based on relative attractiveness of each of the asset class and, hence, these funds are dynamically managed.
While current market valuations do appear expensive from a short-term perspective, as the market has more or less factored in this year’s earnings growth, long-term investors can consider remaining invested as the economic growth rises to a robust 7 per cent plus, making India an attractive investment destination. Further, the bold economic reforms embarked upon by the government have set the stage right for good times for the Indian equity market.


The domestic equity market is on a roll with the benchmark indices currently hovering at all-time highs. The highlight of the current rally is undoubtedly the active participation of domestic institutional investors (DIIs), who, along with foreign investors, have collectively invested Rs 84,793 crore (year-to-date) in domestic stocks for the year till May 31, 2017. (Source: Sebi)


Sunday, May 14, 2017

Using Enterprise Value To Compare Companies


Courtesy : Investopedia

The enterprise value - or EV for short - is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. When sizing up a company, investors get a clearer picture of real value with EV than with market capitalization.

Why doesn't market capitalization properly represent a firm's value? It leaves a lot of important factors out, such as a company's debt on the one hand and its cash reserves on the other. Enterprise value is basically a modification of market cap, as it incorporates debt and cash for determining a company's valuation.

The Calculation
Simply put, EV is the sum of a company's market cap and its net debt. To compute the EV, first calculate the company's market cap, add total debt (including long- and short-term debt reported in the balance sheet) and subtract cash and investments (also reported in the balance sheet).

Market capitalization is the share price multiplied by the number of outstanding shares. So, if a company has 10 shares and each currently sells for $25, the market capitalization is $250. This number tells you what you would have to pay to buy every share of the company. Therefore, rather than telling you the company's value, market cap simply represents the company's price tag.

The Role of Debt and Cash
Why are debt and cash considered when valuing a firm? If the firm is sold to a new owner, the buyer has to pay the equity value (in acquisitions, price is typically set higher than the market price) and must also repay the firm's debts. Of course, the buyer gets to keep the cash available with the firm, which is why cash needs to be deducted from the firm's price as represented by market cap.

Think of two companies that have equal market caps. One has no debt on its balance sheet while the other one is debt heavy. The debt-laden company will be making interest payments on the debt over the years. (Preferred stock and convertibles that pay interest should also be considered debt for the purposes of calculating value.) So, even though the two companies have equal market caps, the company with debt is worth more.

By the same token, imagine two companies with equal market caps of $250 and no debt. One has negligible cash and cash equivalents on hand, and the other has $250 in cash. If you bought the first company for $250, you will have a company worth, presumably, $250. But if you bought the second company for $500, it would have cost you just $250, since you instantly get $250 in cash.

If a company with a market cap of $250 carries $150 as long-term debt, an acquirer would ultimately pay a lot more than $250 if he or she were to buy the company's entire stock. The buyer has to assume $150 in debt, which brings the total acquisition price to $400. Long-term debt serves effectively to increase the value of a company, making any assessments that take only the stock into account preliminary at best.

Cash and short-term investments, by contrast, have the opposite effect. They decrease the effective price an acquirer has to pay. Let's say a company with a market cap of $25 has $5 cash in the bank. Although an acquirer would still need to fork out $25 to get the equity, it would immediately recoup $5 from the cash reserve, making the effective price only $20.

Ratio Matters
Frankly, knowing a company's EV alone is not all that useful. You can learn more about a company by comparing EV to a measure of the company's cash flow or EBIT. Comparative ratios demonstrate nicely how EV works better than market cap for assessing companies with differing debt or cash levels or, in other words, differing capital structures.

It is important to use EBIT - earnings before interest and tax - in the comparative ratio because EV assumes that, upon the acquisition of a company, its acquirer immediately pays debt and consumes cash, not accounting for interest costs or interest income. Even better is free cash flow, which helps avoid other accounting distortions.


The Bottom Line

The value of EV lies in its ability to compare companies with different capital structures. By using enterprise value instead of market capitalization to look at the value of a company, investors get a more accurate sense of whether or not a company is truly undervalued.

Tuesday, May 9, 2017

WEBSOL ENERGY - RESULT UPDATE

Websol Energy reported the above result for the March Quarter/Year Ended 2017. Even excluding other income ,company performed exceptionally well . More than the result, as per notes, company succeeded in its debt reduction efforts and at the same time doubled its production capacity.


Discl: Personally holding shares of Websol, hence my views may be biased.

Saturday, May 6, 2017

Managing The Risks In Value Investing



  Courtesy: Investopedia
 
Although value investing properly executed is a low-to-medium-risk strategy, it still comes with the possibility of losing money. This section describes the key risks to be aware of and offers guidance on how to mitigate them.

Key Risks

  • Basing Your Calculations on the Wrong Numbers
    Since value investing decisions are partly based on an analysis of financial statements, it is imperative that these calculations be performed correctly. Using the wrong numbers, performing the wrong calculation or making a mathematical typo can result in basing an investment decision on faulty information. Such a mistake could mean making a poor investment or missing out on a great one. If you aren't yet confident in your ability to read and analyze financial statements and reports, keep studying these subjects and don't place any trades until you're truly ready.
  • Overlooking Extraordinary Gains or Losses
Some years, companies will experience unusually large losses or gains from events such as natural disasters, corporate restructuring or unusual lawsuits and will report these on the income statement under a label such as "extraordinary item – gain" or "extraordinary item – loss." When making your calculations, it is important to remove these financial anomalies from the equation to get a better idea of how the company might perform in an ordinary year. However, think critically about these items, and use your judgment. If a company has a pattern of reporting the same extraordinary item year after year it might not be too extraordinary. Also, if there are unexpected losses year after year, this can be a sign that the company is having financial problems. Extraordinary items are supposed to be unusual and nonrecurring. Also beware a pattern of write-offs.

             Ignoring the Flaws in Ratio Analysis
 
Earlier sections of this tutorial have discussed the calculation of various financial ratios that help investors diagnose a company's financial health. The problem with financial ratios is that they can be calculated in different ways. Here are a few factors that can affect the meaning of these ratios:
    • They can be calculated with before-tax or after-tax numbers.
    • Some ratios provide only rough estimates.
    • A company's reported earnings per share (EPS) can vary significantly depending on how "earnings" is defined.
    • Companies differ in their accounting methodologies, making it difficult to accurately compare different companies on the same ratios. (Learn more about when a company recognizes profits in Understanding The Income Statement.)
            Overpaying

One of the biggest risks in value investing lies in overpaying for a stock. When you underpay for a stock, you reduce the amount of money you could lose if the stock performs poorly. The closer you pay to the stock's fair market value – or even worse, if you overpay – the bigger your risk of losing capital. Recall that one of the fundamental principles of value investing is to build a margin of safety into all of your investments. This means purchasing stocks at a price of around two-thirds or less of their inherent value. Value investors want to risk as little capital as possible in potentially overvalued assets, so they try not to overpay for investments.

           Not Diversifying

Conventional investment wisdom says that investing in individual stocks can be a high-risk strategy. Instead, we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors. However, some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks, as long as you choose stocks that represent different industries and sectors of the economy. Value investor and investment manager Christopher H. Browne recommends owning a minimum of 10 stocks in his "Little Book of Value Investing." Famous value investor Benjamin Graham suggested 10 to 30 companies is enough to adequately diversify. On the other hand, the authors of "Value Investing for Dummies, 2nd. ed.," say that the more stocks you own, the greater your chances of achieving average market returns. They recommend investing in only a few companies and watching them closely. Of course, this advice assumes that you are great at choosing winners, which may not be the case, particularly if you are a value-investing novice.


            Listening to Your Emotions

It is difficult to ignore your emotions when making investment decisions. Even if you can take a detached, critical standpoint when evaluating numbers, fear and excitement creep in when it comes time to actually use part of your hard-earned savings to purchase a stock. More importantly, once you have purchased the stock, you may be tempted to sell it if the price falls. You must remember that to be a value investor means to avoid the herd-mentality investment behaviors of buying when a stock's price is rising and selling when it is falling. Such behavior will destroy your returns. (Playing follow-the-leader in investing can quickly become a dangerous game.
Value-investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." You will probably want to sell your stocks when it comes time to make a major purchase or retire, but by holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (and the price you paid for them).

Basing Your Investment Decisions on Fraudulent Accounting Statements

After the accounting scandals associated with Enron, WorldCom and other companies, it would be easy to let our fears of false accounting statements prevent us from investing in stocks. Selecting individual stocks requires trusting the numbers that companies report about themselves on their balance sheets and income statements. Sure, regulations have been tightened and statements are audited by independent accounting firms, but regulations have failed in the past and accountants have become their clients' bedfellows. How do you know if you can trust what you read?  
One strategy is to read the footnotes. These are the notes  that explain a company's financial statements in greater detail. They follow the statements and explain the company's accounting methods and elaborate on reported results. If the footnotes are unintelligible or the information they present seems unreasonable, you'll have a better idea on whether to pass on the company.
Not Comparing Apples to Apples

Comparing a company's stock to that of its competitors is one way value investors analyze their potential investments. However, companies differ in their accounting policies in ways that are perfectly legal. When you're comparing one company's P/E ratio to another's, you have to make sure that EPS has been calculated the same way for both companies. Also you might not be able to compare companies from different industries. If companies use different accounting principles, you will need to adjust the numbers to compare apples to apples; otherwise you can't accurately compare two companies on this metric

Selling at the Wrong Time

Even if you do everything right in terms of researching and purchasing your stocks, your entire strategy can fall apart if you sell at the wrong time. The wrong time to sell is when the market is suffering and stock prices are falling simply because investors are panicking, not because they are assessing the value of the quality of the underlying companies they have invested in. Another bad time to sell is when a stock's price falls because its earnings have fallen short of analysts' predictions.
The ideal time to sell your stock is when shares are overpriced relative to the company's intrinsic value. However, sometimes a significant change in the company or the industry that lowers the company's intrinsic value might also warrant a sale if you see losses on the horizon. It can be tricky not to confuse these times with general investor panic. Also, if part of your investment strategy involves passing on wealth to your heirs, the right time to sell may be never (at least for a portion of your portfolio).

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