In spite of the dead boring name the study is very valuable as I
have recognised the findings in my life and I am sure you will too.
The study found that the stock
purchases by neighbours have a large impact on the stock bought by
investors.
For example the researchers found a 10
percent increase in neighbors’ purchases of stock in a particular
industry was associated with a 2 percent increase in stock purchases
in the same industry by those living nearby.
Other findings by the study were:
-
That investors were more likely to
invest in a companies head quartered within 50 miles of where they
live.
-
Also investors more readily
followed the investment choices of their neighbours if they lived in
large metropolitan areas.
I have seen the findings of the study
play out in my life.
You meet friends at a party or dinner
and someone mentions an investment that has done well.
Or someone mentions that at the company
she works for, has so many orders that everyone is working day and
night and she is buying as many shares as possible.
I, and I am sure you, are immediately
interested.
Even though I avoid stock tips like the
plague I still get sucked into them against my will sometimes.
I think its an inborn human trait to
fall under the spell of stories.
It is easier to be swayed by a good
story than an analytically look at the facts.
Something like a moth to a flame.
I had such a story stock in my
portfolio recently and it was not a pleasant experience.
This is what happened:
-
A bit more than a year ago I met
the CEO of a small listed company at the birthday party of a friend.
-
I took a look at the company and
saw that it was relatively undervalued and I asked the CEO about it
the next time we had contact
-
He mentioned that all was going
well, stating the information from the recent regulatory news
filings (no insider stuff)
-
He told a great story and I was
sucked in
-
I looked at the company again and
invested
-
The shares fell with the market
decline last year and continued falling this year against the
market, getting cheaper and cheaper. Going down to a price to
earnings ratio of less than two.
-
I remember the CEO's words and
ignored my normal hard stop loss at a 25% loss.
-
Then came the news that a
subsidiary has been put into liquidation and an investigation has
been launched
-
Now I was really kicking myself as
my loss was at 78% after a sharp drop in price
-
I sold all the shares after a
bounce off the all time low.
I am now even more allergic against
stock tips from anyone. Even more so if there is a story attached to
the idea.
The only positive development, apart
from learning this lesson again, is that previous experience has
taught me to invest less than half of my normal position in story
stocks.
Al least what I have learned before has
paid some dividends, helping to limit my losses.
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Learn from my mistakes and treat investment tips
and story investment ideas like any normal investment that must go
through your normal analysis routine. And do not forget stop losses
should you use them.
Your trying to ignore story companies analyst
Tim du Toit
P.S. A media company in the wrong country at the wrong time...
This month the company I found for subscribers is located in France.
In terms of the size of companies I look at its quite large with a market value of €1,72 billion.
The company owns the most popular television channel in one of the largest European countries but is also very active in new media channels including the internet, tablets and smart phones.
In spite of this, the market views it as an old media company that is soon going the way of the dinosaurs. However, when you look at its financial statements you will see what a great business it is.
Its balance sheet is solid with no debt, and it generates a high amount of free cash flow and profits. This enables it to pay a dividend of just under 7% that can easily be maintained and has room to increase.
When I recommended the company it was trading at 7 times free cash flow, 7,7 times 2010 earnings and 5,6 times EBIT to enterprise value.
I am sure you will agree this is undervalued.
To immediately get your hands on this value investment idea (for as little as €39) click here.
