SmartCapitalist.com

Trying not to Lose on Wall Street

Thursday, February 02, 2006
If you are either investing in stocks, or are looking into becoming an investor, there are several things you need to watch out for. Keep in mind that I am writing this article from the perspective of investing for the mid to long run. This is for stocks you will be in for 1-5 years. Not necessarily 30 years, and not 2 months either.

Watch out for companies that are riding momentums and not earnings. When a stock goes up due to earnings, that profit has a good chance of being there for a long time. However, when a stock moves up because of momentums of the market, it is likely that the stock will face a significant drop in the future. These stocks tend to attract the kind of investor that will ditch the stock on any given bad day. If that happens, then the stock price will go way down and it will cost you a lot of time to wait for the recovery if you a re a buy and hold investor.

How do you identify a stock that is riding a momentum? Well a very good example of one of these companies is Google. Now Google's stock is already valued with some huge projected growth. So by investing you are actually taking the position that Google will do BETTER than these already inflated cash flows and assets. What makes this risky is that this over inflated company can actually do quite well and make a lot of money, but since it may still not meet these projections, the stock could drop even when the company makes money.

The inverse, or the "preferable" place to put your money is a company that does not have as much overvaluation, and looks like it will be making good returns on the long term. This usually reduces the risk that you will lose money in a deflation that will take some good gains to recover.

Remember, there are good gains to be had on the stock market, however you should be mindful of where the gains in stock are coming from, and how long it will continue to grow. The stock market is a smart player can really beat out an irrational player in the long run. It is very different than investing in CD's or bonds.