Getting rich through stocks is EXCITING! These tips will help ensure you don’t lose money in the process! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Hello!
We’re thrilled to share with you another investing insight in today’s “The Independent Investor.”
Every Wednesday, we publish articles about investing because we want to help you achieve true financial freedom through wealth creation.
In this article, we’ll talk about the importance of doing one’s due diligence in the stock market.
Continue reading below to know more about this topic.
Miles Everson
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
The stock market is full of opportunities that enable individuals to create and build wealth. Due to this, trading stocks has become a popular activity for lots of people in the U.S.
In fact, for the past several years, the number of people who invested in the market has gone up considerably. In 2020, Bloomberg Intelligence found that individual investors made up around 19.5% of U.S. equity trading volume.
Additionally, there were lots of rookie investors who were making moves of their own in the market.
While this development was encouraging, it also meant lots of these individuals lacked market experience. They simply relied on recommendations found on social media platforms and other unreliable sources.
An example of this is the infamous GameStop stock craze of 2021.
If you’re not familiar yet, GameStop is a video game retail company known for its physical storefronts across the U.S. In 2021, the company was on the brink of collapse after years of declining performance.
However, in January of that year, the stock price of GameStop rose to all-time highs.
Retail investors from Reddit who urged folks to buy stocks of the video game retail firm caused the massive uptick in the retail firm’s stock price.
While this led to some taking home massive returns, those who didn’t cash out before the stock price dipped lost thousands of their hard-earned money.
As can be seen from this craze, investors stand to lose a lot if they don’t do their due diligence when buying stocks.
Public Companies That Do Not Undergo Rigorous Screening
Photo from Yahoo! Finance
In 2021, only 11% of 199 special purpose acquisition companies (SPACs) traded above their offering price. On average, SPAC shares have underperformed, having lost 43% of their value.
Just a brief background: SPACs are companies created for the sole purpose of raising capital by going public through an initial public offering (IPO). Once this happens, these firms are given 2 years to merge with or acquire an existing company.
Typically, SPACs don’t go through the rigorous screening process that is typical among normal IPOs.
The speed in which such companies could be established made them attractive to Wall Street at the height of the pandemic. In fact, investment banks made millions by helping these firms sell stock and complete mergers.
On the other hand, individual investors lost thousands, if not millions, of their hard-earned money because most of these companies underperformed.
You see, SPACs have been around for years and some of them are legitimate. Unfortunately, as the investment vehicle gained popularity in recent years, suspicious companies and investment banks took advantage of it.
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As we’ve discussed with the examples above, failure to do due diligence on the stocks available in the market could lead you to massive financial losses.
You need to be careful where you put your money. As much as possible, get the full picture of a company’s operations to determine whether you should invest in it or not.
So, how can you go about doing these things?
Here are a few tips:
- Refrain from relying solely on Wall Street stock picks. These recommendations are written and disseminated based on profit and not your financial interests.
- Avoid making trades based solely on information coming from mainstream financial media. More often than not, news coming from these outlets are written to mislead readers and make them panic.
- Study the credit of the firms you plan to invest in. Digging deeper in this specific aspect will allow you to gain a better understanding of a company’s financial stability.
- Look up a company’s headquarters. Doing this will tell you whether the address points to a firm that’s in actual operation.
- Find out who audits the company you plan to buy into. Once you do this, see what the U.S. Public Accounting Oversight Board (PCAOB) database says about the auditor of the firm. By doing this, you can see whether an auditing report about an organization checks out or not.
- Check if anyone from the upper management of a firm has a history of fraud. If there is, steer clear of the company.
Keep these tips in mind when looking for a company to invest in!
As we’ve discussed above, the stock market is filled with opportunities that will allow you to create and build wealth. However, you have to do your due diligence in the stocks you want to buy.
Through this, you’ll avoid losing lots of money while investing in the stock market.
Happy mid-week, everyone!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
LITERALLY.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
Our goal?
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Cheers,
Kyle Yu
Head of Marketing
Valens Dynamic Marketing Capabilities
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