Finance & Investment Investment Golden rules for losing money 2
As we said last issue, to make money, sometimes it's better to first concentrate on not losing it. With that in mind, here's the second part of our series, with five more golden rules for losing money.
5. Buy cyclical stocks at the top
In last issue's review of property group FKP, we discussed the natural human tendency to extrapolate recent events. So when a cyclical stock like a steel company or property developer has a few tough years, investors tend to make the assumption that the bad times will last indefinitely. This can sometimes offer good opportunities for the canny investor, as it did for subscribers who followed our first strong buy recommendation on FKP in issue 84/Jul 01 .
In the same way, when these stocks show a few years of good results, thanks, for example, to strong Chinese metal demand, a booming property market or some other factor, the market tends to extrapolate the good times. It's the same mistake made at different ends of the cycle. Just at the peak of a cycle, investors can confuse a cyclical stock with a growth stock and bid the shares up, perhaps to a very high PER. But when earnings are at a peak, that's exactly when cyclical stocks should be selling on a low PER. When earnings fall, as they inevitably do with a cyclical downturn, the shares come crashing down. Farmers-who are used to the feast/famine cycle of a life on the land-seem less susceptible to this folly than most.
6. Follow overly acquisitive management
In his comprehensive book, Two Centuries of Panic, Trevor Sykes says that 'more companies are ruined by bad management than by bad economies'. We'd most definitely agree. Overly acquisitive managements - those hell-bent on growth, seemingly at any cost, are especially prone to getting into trouble. How so?
Visit The Intelligent Investor for the rest of this article on Golden rules for losing money Part 2 to find out more on value investing.
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