How many times have you been told about 'the next big stock' by a broker, a friend or a colleague? The stock, you are told, has all the makings of the next blockbuster.
The argument is persuasive, either in the form of anecdotes or backed by data. Maybe an investment guru has made millions on the stock. Or, there is a chart showing the stock's past returns or, maybe, a study listing reasons why it will bring you enormous riches.
However, once you invest, the stock stops performing, or begins well and then starts to falter. You are disappointed and decide never to invest in any stock.
If this sounds familiar, take heart, for you have company. Aswath Damodaran, Professor at New York University, in his book 'Investment Fables,' captures the essence of these stories. "While there are hundreds of schemes to beat the market, they all are variants of about a dozen basic themes that have been around for as long as there have been stocks to buy and sell. These broad themes are modified, given new names and marketed as new strategies," says Damodaran.
We identify some of these strategies that appeal to stock investors and see if they are workable or, as Damodaran says, just fables.
MYTH: BUYING DIVIDEND-PAYING COMPANIES IS AS SAFE AS INVESTING IN DEBT. AND A COMPANY THAT HAS ANNOUNCED THAT IT WILL PAY HIGH DIVIDEND THIS YEAR IS A GOOD BET.
Reality: Investors with little risk appetite prefer the safety of government bonds or bank fixed deposits rather than stocks. The belief is that these are risk-free. Such investors are told that a dividend-giving stock offers safety, regular income, plus scope for capital appreciation. But what is not mentioned is that dividend payments can never be predicted, a big minus for any investor looking for regular income.
Take Bajaj Finance. Its stock went up from Rs 400 on 2 January 2006 to Rs 1,318 on 31 December 2012. The company paid dividend in each of these six years. In 2005-06, it paid Rs 4 per share. In 2008-09, it paid just Rs 2. Some say this is because 2008-09 was a year of economic crisis.
No comments:
Post a Comment