“My investment in Company X is a sure thing.”
Misconception: If a company is hot, you’ll definitely see great returns by investing in it.
The market is a great collection of people and not a machine that gives wholly logical assessments of the economy or the performance of the companies that are traded as securities.Thats why its prudent to understand that no investment is a sure thing. Any company can hide serious problems from its investors. Many big-name companies – like Enron and WorldCom – experienced sudden falls, clear examples in Kenya include Chase Bank and National Bank which had been massaging its numbers. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology.
Furthermore, if you buy a stock when it’s hot, it might be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of, or in addition to, already-diversified unit trusts or mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous but offer long-term value.
Also Read; How to Invest at the Nairobi Securities Exchange
Book Recommendations; The Barefoot Investor, Buy the Fact Sell the rumour)
