In the late 1980’s Japan seemed set to take over the world. The Japanese stock market was the envy of the world and the Nikkei stock index was around 39,000. Today it is less than 10,000. One of the bad stock investments of our time would have been to buy a basket of Japanese stocks twenty-four years ago and hold them. There are several types of bad stock investments. Holding dividend stocks that do not keep up with inflation, falls in the bad stock investments category. Holding on to a stock that has run its course in search of just a little more profit also falls in the bad stocks investments category. Here we look at tactics, strategy, fundamental analysis, and the efficient market to consider good and bad stock investments.
What Goes around Comes Around
This old proverb tells us that what we do one day eventually comes back, often times to haunt us. We too often become victims of our own thoughtlessness. The major psychological drivers in the market are fear and greed. The twin demons lead to more bad stock investments than all other reasons. The best way to avoid falling prey to these bugaboos is to study what you want to invest in. Proceed by degrees. Diversify your investments in such a way as to avoid putting all of our investment capital where one set of factors could bankrupt you. Take the long view of the stock market. Consider the long view when investing in gold. Gold has rallied twice in the last forty years and fallen back twice. Consider practical approaches to investing such as investing in beer. People will always want a drink when the market rallies and when it falls. The time honored beverage has a wide following and is a worldwide source of profit. Think of what makes money in a rising market and what makes money in a recession. Do your homework and do not just rely on tips.
In the late years of the 20th century Microsoft bailed out Apple Computer. Apple went on to invent hand held devices that have hurt the Microsoft PC business. This was a deal of money for patents instead of money for stock but it still falls in the bad stock investments category. Microsoft or Mr. Gates privately, should have required stock options in return for their bailout money. Then they would have prospered on the rise of Apple to the corporation with the highest capitalization in the world. Instead Microsoft was concerned about antitrust activities of the US government and set its competitor on the path to dismantling the Microsoft Empire.
The Efficient Market
It is a true story that a bunch of stock market reporters threw darts at the stock pages one day and tracked the stocks that the darts hit. Their randomly selected stocks outperformed the market. In the book A Random Walk Down Wall Street the authors noted that in the 1960’s and 70’s one could reasonably expect to buy ten large cap stocks and make 12% per year per year. With forty small cap stocks one could expect to make 18% a year. When you are buying and selling stocks look at how the market prices things and avoid bad stock investments.