Daily Gains Letter

Investors Beware: Don’t Fall for This Investing Mistake

By for Daily Gains Letter | Mar 5, 2013

















050313_DL_zulfiqarThere’s a myth among investors that by looking at the broader stock market—such as the key stock indices—and only focusing on it, investors can improve their returns significantly. In other words, the overall market condition can be the best way to improve your returns; you don’t necessarily have to waste your energy to research one company, just look at where the overall market is going.

While there may be some validity to the argument, looking at the broader market doesn’t really tell you much about a certain company that you might be invested in or want to invest in.

No doubt, a certain stock might follow the general direction of the market on any given day when there isn’t a lot of news about the company, but on the other days, it can be totally different—for instance, events such as earnings announcements and investors’ meetings can cause a fluctuation in stock prices.

Take a look at the chart below of the S&P 500 from 2009 to today.

 

dl_03052013_image001Chart courtesy of www.StockCharts.com

The most-quoted index when it comes to the U.S. stock markets, the S&P 500 has gone up significantly. In early 2009, the S&P 500 was below 700. Since then, it has more than doubled!

Now, let me ask this question: with the S&P 500 more than doubling over the last few years, did every company show similar returns? To say the least, no. The key stock indices only give us a broad overview rather than a precise picture of a company. Going back to the chart above, over time, while the S&P 500 more than doubled, there were some companies that did much better than the index, and there were others which didn’t do as well.

Focusing and learning more about the companies you own or are looking to own can help you get a better return. The reason for this is that when you focus on the company, you know what to be aware of and what to expect. If you only look at the boarder market, you just won’t see it.

In addition, you can protect yourself from bigger losses in the future if things turn sour for the company.

Warren Buffet said, “Risk comes from not knowing what you are doing.” The implication behind this is very simple—knowing what you’re doing reduces risk and protects you from potential losses.

Investing isn’t easy; that goes without saying. When an investor focuses on a company, conducting proper research can take a significant amount of time. A few of the things investors should look at when assessing companies include: growth rates, assets, liabilities, and the company’s management team. In addition, investors should evaluate the company’s competitive advantage over other firms in the same industry.

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