What Stocks Not to Own for the Long-Term

A Black List… Of Sorts

Many things have been said about what and how to buy stocks, but not much on what to avoid. In a typical portfolio, there will always be winners and losers. Sometimes these losers overwhelm the gains. Besides judicious cutting of losses before they swell further, avoiding them in the first place would be even better.

We highlight some categories of stocks below which we think are not suitable for long term holdings. The key word being long term. Another point is that this is not a total blacklist of what to avoid, some of them do turn out to be darlings, but the odds are working against you.

Penny Stocks with High Volumes

Look at any old listing of top volume penny stocks. How many have grown to be significant companies? Anecdotal evidence suggests none make it big. This is evidence enough that such positions are not meant to be held for the long term.

One should look at it from a listed company owner’s perspective – if one has genuine interest in growing the business, why would significant chunks of their shares be traded on a daily basis?

One has to question the motivation behind such moves then. Any real desire to grow its business is tenuous at best. There usually is some credible (sometimes incredible) story that goes with such high volume activity.

But, this isn’t strictly a Malaysian phenomenon. Markets across the world have their own versions of high volume penny stocks.

Our perspective of these stocks is that the business behind it is secondary to the current share price trading activity. The high volume is simply not a reflection of the interest of real investors.

The new contract announcement, concession-win, diamond mine or large profit almost never materialises or is sustained, except maybe in the form of a MOU. Quite frequently these companies then come back with high volumes – but with entirely new owners, new business ventures, or a new company name, but still the same disappointing results.

Penny stocks with high volume are perhaps good for high risk trading. But, holding them without a short term exit strategy or cut loss policy is detrimental to portfolios over time.

Owners Who are Not on Your Side

There are some high quality listed businesses in Malaysia, but unfortunately they are controlled by shareholders that make money differently from how you do as an investor (i.e. via share price appreciation and/or dividends).

The Malaysian corporate landscape is strewn with high quality businesses muddled by asset injections or acquisitions – unrelated diversifications, badly valued acquisitions or assets being flipped into the listed company for large profits.

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