Top investment mistakes

Top investment mistakes 

Stock market is like a double-edged sword, and every investor want to play it smart. But in the stock market to earn good returns the main problem is the lack of industry-specific knowledge of ordinary investors. This article will focus on 10 kinds of common sector can be taken care of, while investing in the stock market investment mistakes. 

1. Debt burden (telecommunications) 

Company hopes to establish and expand large enterprises huge debt taken is very dangerous. Mature companies incur substantial debt, to expand their business also requires trouble. To finance its strategy to promote the cable business, AT & T borrowed heavily, but it left a huge debt burden and large capital expenditure needed to upgrade its network, the end of the company's cable business sales far below the purchase price . 

Commonly used in the telecommunications industry, a measure of debt divided by EBITDA debt ratio is much higher than 3 should be treated with caution. 

2. Single product risk (health care) 

It may sound strange, but a blockbuster drug could become the company's disadvantage. If the drug's revenue as a large pie, than the company's fate is too heavy can be linked to the drug. Because the drug will eventually lose its patent, we believe that wise investors accounted for a single product risk, requiring a slightly larger margin of safety. It is wise, because the patent expires, it will be very difficult for companies to earn the same amount of revenue generic competition hits, the company lost a big chunk of revenue, and its profitability will usually fall. 

3. Leasing (Retailers) 

Many retailers use under operating leases space for your own store. Because these leases have not capitalized in the balance sheet remains closed, they underestimated the firm's total financial obligations, and can be artificially inflated financial health. Leasing is not intrinsically bad or deceptive, in fact, their presence is most retailers expansion plans of the core. Lease obligations, can be found in the "under the heading commitments and contingent corporate financial statements footnotes" 

Take a closer look at the company's financial position before, claiming that it is in the best financial shape. For example, Tommy Hilfiger's appearance, has a good financial situation, 2002 to enter. The company had $ 38.7 billion U.S. dollars in cash and $ 638 million of total debt. However, professional clothing company in the form of operating leases has $ 27.3 billion future financial obligations. 

If we increase the off-balance sheet lease obligations on the balance sheet, the total comes to $ 911 million, covering more than do not look now stronger. Tommy Hilfiger's sales decline into 2002 and stagnating profits and cash flow. When Hilfiger's announced that it needs to close many of its retail stores in October 2002, breaking the lease payments, the share price was finalized. 

4. Off-balance sheet financing (Business Services) 

FedEx earnings in 2002 of $ 1.8 billion in debt. Given its market capitalization of about $ 1.6 billion, at the end of fiscal year 2002, the implied leverage of 11% (ie, $ 180 million / $ 16 one billion) seems reasonable, if not low. Further scrutiny, revealing a large lease will increase by nearly $ 1.2 billion in debt Federal Express Corporation's balance sheet, FedEx option to purchase all of the assets, rather than lease their obligations. Including off-balance sheet debt financing part of the obligation to promote FedEx leverage ratio is much higher. 

A good rule of thumb is to find a hand on Form 10-K leasing or financial statements, labeled "lease commitments" in a footnote, and look forward to "The future minimum lease payments" operating leases "related discussions." Looking next year the minimum lease payments, it is multiplied by eight, you will have a good rough estimate of how much debt leasing representative. 

5. Stock bubble (hardware companies) 

Technology Hardware companies often face a period of inventory imbalances. Either they accumulate too much inventory or client suddenly requires more than they can be easily provided. The risk is that the product or component sitting on the shelf for a long time, it may take a substantial discount, or worse, not sold. We see this fall in 2000, shortly after the Internet bubble burst, with Cisco and other companies billions of dollars in write excess inventory. 

Warning sign for investors is that when a company's inventory growing faster than sales over several quarters. In the supply chain complexity, but even this trend becomes blurred. Parts suppliers, distributors and contract manufacturers to maintain inventory beyond the level of the final product, the producer, even at the end of producers often bear the economic risk of these inventories. Look in the "Risk Factors" in a 10-K or the financial statements of these situations. If they exist, inventories shown in the balance sheet may not reflect the true inventory. 

6. Click to buy large (media companies) 

Some investors turn their attention to a media company, is responsible for the current movie blockbusters, the latest three platinum albums, or new hot TV series. Please do not invest in such companies. Media Group to make these hit the market are large, complex entities, you need much more than long-term profit growth to stimulate a hit. If the media company a substantial discount to their intrinsic value traded, investors can look to invest in them, otherwise it would be better to avoid it. Or, if the media company is able to give a number of popular shows or movies series, than it can wisely invest in such companies. Not just invest in a blockbuster movie or program. 

7. Non-recurring revenue sources (telecommunications) 

Telecommunications companies can not expect to recover the cost of a piece of equipment in any given year, so the development of recurrent revenue streams, it is important to obtain a sustainable return on investment. Sometimes, companies seeking non-recurring revenue sources to promote economic growth and profits, but can not expect these revenue sources to provide future returns. 

For example, Qwest companies spend billions of dollars to build long-haul network and fantastic revenue growth as a network into service. Unfortunately, most of this growth came from a basic network capabilities, rather than continuous service contract sales. From pre-sales of these capabilities, which produces high-margin revenue, was booked, to the rapid growth of appearance. Once this type of capacity demand dried up, revenues began to decline, shrinking profits. The company left a small business to support its debt burden, and are forced to sell assets. 

8. The margin decline (telecommunications) 

Telecom investors must pay close attention to profitability. One of the measures in this industry is EBITDA, which gives an example of how to support operating cash capital expenditure requirements and debt service awareness. To calculate EBITDA, operating income and adding back depreciation and amortization expenses. EBITDA margin decline may be competitive pressure or an early indicator of inefficient operations. EBITDA is a blunt instrument, and should not be mistaken for operating cash flow, as reported in the statement of cash flows. Focus on EBITDA can cover issues such as the growth in accounts receivable, which will be obvious statement. 

9. By the circulating counterfeit (energy sector) 

Energy sector is prone to violent cyclical. Available supply and demand tend to have small changes in commodity prices and a large profit impact. However, neither low nor periodic peaks tend to last very long. It is important to be aware of this before investing in this area. Otherwise, you may be tempted to do when you sell the sector is relatively poor, but things began to look for or purchase its peak, companies reap a windfall (grow into reverse). 

10. Unsafe dividend (Utilities) 

Many investors are attracted to the utilities sector, as a generous dividend yield of many stocks in the industry wage. However, dividends paid by the Company's financial position is secure. With the utilities sector as a whole to pay for about three quarters of earnings as dividends, high dividend payout ratio was cut to improve when times are tough risk. Pay attention to the proportion of more than 90% if the soldier, or if the debt to total capital ratio rose to 50%. 

For example, if a stock's return seems ridiculously high, 15%, comparable to generate only 5% of the investment, it may be a sign that the company has run into some trouble. After all, when the company ran into trouble, their stocks tend to decline, which pushed up their production. Also a struggling business, a simple way to save cash by cutting dividend payments.