Turnaround Investing Mistakes
One of the keys to making money in investing is to avoid making mistakes. If you can avoid at least most of the following pitfalls, you will greatly enhance your ability to make money investing in turnaround situations. Read the 10 most common mistakes turnaround investors make.
Don't Try to Time the Market
There is an old saying in the investment business: “You can always tell the market-timers: they’re the ones with the holes in their shoes.” While there may be cycles in the stock market, we don't know anyone who can successfully time those cycles. Find out why we always recommend that investors should not attempt market timing.
A Note of Caution on Penny Stocks
Although The Turnaround Letter chooses not to include “penny stocks” in our portfolio, it is possible to realize substantial profit with low-priced stocks, particularly if that price is low because the company is in the process of turning around. Turnaround companies usually have substantial operating histories and significant assets, but their stock prices are low because recent results have disappointed investors. Find out how to distinguish cheap stocks from value stock picks.
IPO = It's Probably Overpriced
There is substantial academic research showing that the majority of IPO’s do not perform well for several years after the initial price surge following the offering—and Facebook didn’t even make it beyond the first day before fading. See what The Turnaround Letter recommends as a prudent investment alternative to IPOs.
Buying Stock of Companies in Bankruptcy
The Turnaround Letter rarely recommends that you buy the stock of a company operating under protection of the U.S. Bankruptcy Court. Stockholders are the lowest priority when it comes to payback; and—even if a company can successfully emerge from Chapter 11 protection—there is rarely enough value in that reorganized entity to give the old stock any value. Read more of "Buying Stock of Companies in Bankruptcy."
Insider buying consists of buying shares of stock in a corporation by someone who is employed by that company. Insider buying, which is based on public information, is absolutely legal. While trading on specific, undisclosed inside information (a practice known as insider trading) is certainly illegal, insiders are allowed to buy and sell their company’s shares provided that they report all trading activity to the SEC. Learn how these trading details can be a very useful tool for savvy investors.
Convertible bonds are an attractive vehicle for investors who want equity-like returns but cannot bear the volatility of stocks. See if convertible bonds are the right option for your turnaround investment portfolio.
Constructive management shake-ups could indicate that a successful turnaround is in the cards for some companies. Find out why a change in leadership might be a good sign.
Know What You Don't Know
We recommend investors not attempt to time the market—but rather, choose a level of stock market exposure and stick with it, focusing efforts on fundamental analysis of select stock picks. Get more straight-forward stock market advice.
A lot of good companies' stocks have suffered from value compression, and this can offer a potentially lucrative opportunity for the well-informed turnaround investor. Learn more.
Secular vs. Cyclical
When considering a potential turnaround stock opportunity, it is always a good idea to ask, “Is the company’s problem cyclical (or otherwise temporary), or is it secular?” Find out how you can make that critical distinction.
Sell When They Want to Buy
There is an old saying on Wall Street: "Bulls make money; bears make money but pigs get slaughtered." Investors who consistently pursue a bullish long-term strategy can make money, as can investors who consistently apply a bearish strategy. The investors who do poorly--i.e. “get slaughtered”--are those who are greedy and who always chase the hot stocks or hold onto stocks too long. Read more.
Diversification is the best, and in some cases only, way to reduce risk to your investment portfolio; and diversification is especially important with turnaround stocks because these situations inherently have more uncertainty—and hence, risk—than many other types of investments. Learn how you can use mutual funds for ready-made diversification.
Warrants can offer a lucractive option for those investors who are willing to take on more risk to obtain potentially higher returns. Read more about the pros and cons of this approach.
Year-End Bounce/Tax-Loss Selling
Investors can capitalize on year-end, short-term calendar quirks to lock in stock market gains. Learn more about this stock profit phenomenon.
Don't be Trendy!
Turnaround investors need to be especially wary of trendy sectors, and The Turnaround Letter's one rule in choosing stocks is that there must be a solid core business with long-term viability. Learn why your investment strategy shouldn't follow a passing fad.
High Yield Bonds
Many high yield issues have return--and risk--characteristics closer to stocks than to other fixed income instruments. Also, many companies that issue high yield debt are in the process of turning around, or at least trying to do so. Do the the inherent risks here outweigh returns?