Due diligence check is the fundamental thing that all value investors should do before they invest in stocks. The decision to invest into a stock is strictly coming from the business perspective and not based on emotion reasons or news.
Buying a stock without due diligence check may end up grabbing to a dropping knife. One good example that i can still think of is the story of Enron Corporation.
Your emotion may cost a bomb in your stock investing
In 2001 and 2002 the news was literally covered by the story of the Enron Corporation. Workers and shareholders lost nearly everything in one of the biggest financial scandals of our lifetime. Those who invested in Enron saw their stock plunge fro nearly 80 dollars a share down to a few cents. Those who were working for the company as well as investing lost their jobs as well as any financial security for the future. Even after the Enron scandal, people who work for large companies are still investing quite heavily in their own company stocks. This can be quite dangerous and can spell disaster should anything happen to the company.
Investing in company stock is dangerous. When you practice value investing, you should attempt to do your own due diligence check on other stocks to diversify your portfolio. Like the old saying, don’t put your eggs all in one basket. Companies however, will try to entice new employees to invest in their stocks, many times matching what you invest. However, what happens if the company goes under or suffers a major setback. You could end up loosing your job and be left with worthless stock. It can happen and quite often does.
Many employees feel more confident when they invest in their own corporations. They think that they know this company better than others and will have first hand knowledge of new products and opportunities coming their way. However, it is not just about company growth being a single factor to invest. There are multiple factors to consider. There are also many unforeseen events that can greatly influence the stock market. If you do invest in company stock, try to diversify into others as well. If the company has a matching program, make sure they are investing in other stocks rather than their own.
There is no such thing as a company that can’t go bankrupt. Even Bill Gates does not believe it. He even sells of large shares of Microsoft to diversify his holdings, even with all of the security that Microsoft brings.
Be very careful of investing in company stocks. They should not be more than 10 percept of your stock portfolio. Remember, Value investing is about making money; it isn’t about showing faith in your company.
Don’t believe in market rumors.
You may often come across stock commentary section in your newspaper. Just read it lightly and not be too believing into the news or writeups by the stock analyst from certain financial institutions or banks.
An Italian researcher, Nicola Gennaioli and his colleagues at Bocconi University in Milan, Italy, found that stocks least favoured by analysts yielded five times more than buying the most recommended.
They found that over the past 35 years, those who invested in the 10% of stocks US analysts were most optimistic earned 3% annually. By comparison, investing in the 10% of stocks analysts were most pessimistic about would have yielded as much as 15% a year. This clears the air why stock analysts are so enthusiastic to share their views on selective stocks.