if only some people read my article they would had avoided stocks like MIDAS $Midas(5EN.SI)
Old Man's newbie guide to avoiding investment traps, 3 simple rules to avoid disaster!
1) Avoid... Companies that reports a loss
When you are putting money to invest, you want a positive return... would u even put $10,000 into fixed deposit with a bank if they told u that you would get back $9999 at the end of 1 year? obviously not...
The same goes for investing in companies, you want a company that generates a positive return and create value for shareholders.
Generally I strong prefer companies that have shown at least a 5 or 10 year track record of consistent profits.
On the flip side, if the company has reported a loss in any of those years.. I would generally avoid, just to be safe.
2) Avoid... Companies that pays little to no dividends
Companies can report fantastic earnings or even explosive earnings growth rate... but you never know if the profits they make are real or fake unless the profits are paid out in cold hard cash into your bank account!
Take for example a sportswear S-Chip in the past that showed 20-50% earnings growth! Sales were jumping by multi millions per year but the company ended up going bankrupt and shareholders got zero cash, what the f happened?
In short this S-Chip was selling sport shoes to retail outlets, the customer/store owner paid zero cash down... and could take 500k of shoes straight up on credit, if they sold the shoes and made money they paid the S-Chip... if no shoes was sold.. its was fine...you keep the shoes! The S-Chip when on to sell millions and millions of shoes on credit, year after year... so on paper accounting it recorded way higher earnings and way higher profits each year... but these are only paper profits! Eventually the working capital dried up and they when down!
3) Avoid... Stocks with super high PE ratio
I have this hot dog stand that sells thousands of hot dogs monthly. After deducting material costs, rents and worker's salaries it makes $10,000 a year in net profits... I want to sell this business to you, how much would you pay for it? Lets say you think $100,000 or 10 times earnings is a reasonable amount, so you buy it... its the SAME for STOCKS!
Yet some people would pay 100 times earnings for the same hot dog stand! Yes, I mean 1 million dollars for the same hot dog stand that makes 10k per year! They heard that now hot dogs are a boom, maybe it can cure cancer or maybe it makes you smarter! people are buying this so lets buy it up too, the future prospects are amazzzzing!!!!
Even if you could increase prices of your hot dog by 20% per year or you could increase sales by 20% per year, its obviously still a super bad deal...
Final word, with this 3 basic rules it will help u filter off many traps... but it does not guarantee your safety in the stock market.. you can still lose a lot of money charging blindly into other stocks without proper research... I have seen people spend 10 full days to research on which laptop to buy, but instead spend only 10 mins to decide that it would be wise to go in and buy ISR or AEM.... even after such stocks have ran up 10 times in market price (but not in real fundamentals)
At the end of the day, always do your own due diligence and try to really understand the companies before you put hard earned money in it.