4th Jin of the stock market - Stocks you shouldn’t buy!
Fourth type of stocks that investors in the stock market should stay away from!
So a Big NO-NO to:
- Government-owned, managed, influenced, or single buyer model companies (3rd Jin)
- Companies owned by shady owners or Topi stocks (4th Jin)
- Ideally, companies that don’t have any pricing caps (2nd Jin)
But, I am ok with having companies that may have been fined by price collusion (1st Jin but toothless)!
After all this:
My Ideal stock looks like this:
- Free to charge whatever price they want. This means that economics determines their profits.
- If they want to expand they don’t need government approval, pricing, or blessing.
- They prefer dividends and buybacks more than right issues, bonus shares, or buying sister companies from their profits.
Right?
Here comes the problem!
After doing all this do you know what am I left with?
Mostly aggressive or cyclical companies.
What are cyclical stocks?
Cyclical stocks are shares of companies that are affected by changes in the economy. When the economy is doing well, people have more money to spend, and they buy more things. This means that some companies, like airlines or vacation resorts, do really well during these times.
But when the economy is not doing so well, people might not have as much money to spend, so they buy fewer things. During these times, companies that make luxury items or provide services like travel or entertainment might not do as well.
Yes, there will be a few ever-green tech, textiles, and oil companies and but mostly I am left with cement, steel, fertilizers, autos & allied, and a few chemical companies.
Other than these evergreen companies, do you see the problem here?
These companies make money + their share prices go up when the economy is doing well! Otherwise, despite making money they don’t perform as much.
The other problem is, they hardly pay any dividends. They keep on expanding their business which might sound bad to some investors.
So what should you do as ‘research once and keep buying’ type investors?
Select very very carefully!
If you are a “research once and keep buying type investor” and like this criteria, be very very selective!
- Instead of buying a third-tier, low-priced cement company buy the best cement company available!
- Instead of buying a textile company that has the highest book value and a lot of sister companies under it, buy a textile company that focuses on its core business of making value-added products.
- Instead of buying tech companies that have a lot of promises for the future but no earnings to, buy tech companies that have earnings today.
- Instead of buying a small-priced bank, buy a bank that has a history of growth.
- Instead of buying a promise by a recently reversed listed stock, buy already listed good companies that have already delivered on their promises.
See, the sectors or the companies we have reached after the exclusion of bad ones are risky businesses / cyclical in nature. So why would you want to multiply your risk by buying bad companies?
A good company will not only maneuver the bad times by limiting their losses but also see strong profits and better stock market performance when things improve.
* I can't name the companies since InvestKaar doesn’t have an advisory license!
But I do things differently because I don't particularly fall under the ‘research once and keep buying’ type of investor.
I like to maximize my profits.
So let me give you a peek into my thought process and the steps I take.
I make three categories and then allocate my capital between these.
The 3 types of stocks I prefer to buy
- Companies that I buy purely for dividends (like fertilizers or some oil companies).
- Companies that I buy for future growth i.e. they are not making money today but they have been good companies and they WILL make money in the future (like autos & allied and pharma companies).
- Companies that are making profits today but the stocks aren’t going up (a good example right now can be from the cement sector and some chemical companies).
By doing this I am allowing my portfolio to:
- Make regular income for me from dividends
- Big Potential capital growth when things improve for these companies in the future
- Make quick gains if and when investor confidence comes back
Listen Up: Don’t do what I am trying to do
Just because I am trying to maximize future profits from my portfolio by using the 3 types of stocks, you don't have to! I have 15 years of investing and trading experience behind me.
Keep it simple if you are new and don’t have time to research, make models, or do scenario analysis. That is:
- Stay away from Jin-ridden companies - not for new investors doesn't matter how cheap you get them
- Choose your battle wisely i.e. you want dividends? look for mature companies that have a dividend history - if you want capital growth, stick to evergreen-type stocks.
- Sit back and let these companies do their stuff - make money for you!
This article is just the tip of the iceberg. A lot more understanding is required to choose the best investment for you.
To expand your horizons, signup for our email list here ⬇️
Related Posts
3rd Jin of the stock market - Stocks you shouldn’t buy!
Third type of stocks that investors in the stock market should stay away from!
2nd Jin of the stock market - Stocks you shouldn’t buy!
Second type of stocks that investors in the stock market should stay away from!