Tutorial 61-65 Recap
1) LEVERAGE - investing with leverage is a double edged sword. While leverage magnifies returns it also magnifies losses, which can become permanent. Given the increased risk involved in leveraging a portfolio the Investment Masters tend to avoid leverage.
2) CORPORATE DEBT - companies which carry a lot of debt can face insurmountable problems when or if their business hits tough times. Companies with excessive leverage are also at risk of debt markets closing. Be cognisant of high levels of debt particularly where a company has cyclical earnings. Over the years I've witnessed more company failures because of debt that any other factor.
3) VALUE TRAPS - a key risk for value investors is value traps. These are companies that appear cheap on valuation metrics but the underlying business is deteriorating. This maybe a result of technological obsolescence, changing industry dynamics or poor company management. It's important to ascertain why a company is cheap and to understand the nature of the business to avoid value traps. Just because a stock has fallen 50% doesn't mean it can't fall another 50%.
4) HIGH FLYERS - The Investment Masters have a tendency to avoid buying companies on very high multiples with high growth expectations. Most companies cannot sustain high rates of growth over long periods. When companies on very high multiples miss earnings expectations their PE multiple and EPS forecasts can fall dramatically leading to a significant share price decline.
5) BUBBLES - the Investment Masters are cognisant of investment bubbles and would rather avoid investing in stock market bubbles than face the possibility of a future stock price collapse. When stock prices go parabolic or their is a significant increase in capital chasing an industry or sector it's likely future returns will disappoint.