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Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.
Tip of the week: “Getting in on the ground floor with a new stock may seem enticing, but there are many reasons why most new stocks promoted as ‘can’t-miss’ ideas do miss.”
Some aggressive investors like to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.
These investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor. Many promising junior stocks fail to thrive as businesses for one or more of any number of reasons. To borrow from the opening lines of Tolstoy’s Anna Karenina, successful stocks tend to have a lot in common, whereas unsuccessful stocks tend to suffer from their own unique sets of risks and faults.
Sometimes stocks with intriguing business concepts just never get anywhere. They generate a number of encouraging news releases, but these releases turn out to be a series of exaggerations and broken promises.Look at the latest figures from the undisputed independent authority on investment newsletters, Hulbert Financial Digest. They show that The Successful Investor has beaten the Wilshire 5000 Total Stock Market Index with a spectacular 16.7% compounded over each of the last 10 years. That’s more than 100% better than the index’s 7.9% average! That means that during a decade that included some of the most wrenching downturns in stock market history, The Successful Investor posted remarkable returns for our readers. Pat McKeough tracks three different portfolios for readers of The Successful Investor—one for Conservative Growth, one for Aggressive Growth and one for Income-Seeking Investors. And subscribers get free updates and advice on the stocks they’re following every week in the E-mail/Telephone Hotline. We are happy to offer you a bargain-priced, no-risk introduction to The Successful Investor. It gives you the first month FREE. Act now. Click here.
Promising stocks may start out with a brilliant idea or a plan to get involved in a high-profile or fast-growing business area. They may enjoy an initial burst of sales or even earnings. But many just can’t keep up the momentum. They never reach the critical mass they need to achieve consistent profitability.
This is more common in junior techs, because they compete with well-established, well-financed senior techs. The seniors have an enormous advantage in well-trained staff, sales networks, media contacts and all sorts of other business assets that can take years, if not decades, to develop.
You compound your risk if you invest in a promising junior that is a “thin” or illiquid trader. When a stock is a thin trader, it doesn’t take much buying or selling to influence its price. So if just one important investor decides to sell, it can cause an abrupt stock-price slump. This can spark a cascade of selling and a collapse in the stock’s price. The resulting stock downturn can scare off other potential investors. This can make it impossible for the formerly promising junior to raise additional funds when it needs them.
Investors in start-up companies also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of junior companies ever go on to significant success.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Do you have an example of a “ground floor” stock you bought in its early stages that turned into a big success? Have you turned down a new stock that was being promoted as a “can’t-miss” idea, and were glad you did?
Note: This article was initially published on April 19, 2012.Be the first to comment
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