Do you still believe you can get ahead by choosing individual stocks? As you think about your choices, you are likely to overcome one or two of the following mistakes. If you can avoid it, you may have a chance to fight. But I doubt it.
Mistake #1: Ignoring Company Values
Most stock-picking investors choose stocks based on a company’s winning prospects, paying a premium price in relation to earnings. You may be attracted to exciting innovations in a company, a recent stock split, or the appearance of a financial talk show. The news could be good for business. But remember, as a stockholder, you become the owner of the company. The more you pay your stake in relation to the true value of the company, the more speculation on your position.
For example, in 1998–1999, the stock price of Cisco Systems (CSCO) grew and grew, until investors were willing to pay $ 80/share at the March 2000 peak. At the time, the price was 196 times Cisco’s $ 0.41/share revenue. Looking back, we now know that Cisco investors bought a good business in March 2000. Since April 1, 2022, Cisco’s revenue has grown seven-fold since then. The problem is that investors are overpaid for big business. Today, Cisco is selling at $ 55.66/share. (BTW, Tesla’s price is 122x revenue.)
Mistake #2: Fixing High Dividends
I don’t want to break it up with you, but companies with high dividends are often slow-growing businesses, with even worse prospects for appreciating the share price. After all, if they pay you their money, they have little left to encourage future growth. So, before investing in a high dividend stock, think about how much the company’s revenue is bleeding. If it continues in the course of dividend distribution, will it be able to grow the underlying amount faster than inflation will eat it up?
We would advise against choosing individual stocks to start with because the chances of success are more a matter of luck than skill. By using short -cost mutual funds or ETFs to invest in a wide portion of the global market, you are guaranteed to win some and lose some, but there is a strong possibility of winning more than you lose. By reducing your chances from accidental luck to a different expected outcome, there is more than a better way to plan your financial future.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC ™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a finance professional. In his free time, he is an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional assumptions: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and achieving their distant purposes in a clear way. To learn more at www.alliantwealth.com or to read previous articles, visit www.alliantwealth.com/blog.