How Some Stocks Can Bring Your Portfolio Down

Last year, James Montier (former investment planner with Societe Generale) found more than 40 stocks he considers threatening to investors' capital. Today's valuations are significantly higher, giving rise to the assumption that the same criteria he implemented then would produce a longer list and a larger number of current stocks. Montier isn't one of those dime-a-dozen investment planners - one of the reasons why he has gained a following with his unorthodox way of thinking. He is also a behavioral finance expert and a proponent of no-nonsense value investing as taught by legendary investor and mentor Ben Graham.

It's always up to the investor, although it can be worth your time and effort to listen to his investment advice, specifically on matters such as creating and preserving wealth in these difficult economic times. Here are some basic details on how you can prevent investment losses resulting from permanent capital loss:

Focus on the definition of what investors call a "permanent loss of capital." The permanence or impermanence of stock losses can only be determined if you have a good understanding of the essential value of the stock. There are two scenarios that can effect permanent loss: your basis for cost is actually higher than the stock's basic value, or the essential value of the stock itself has been diminished. It's important to realize that dropping stock prices do not result in permanent capital loss. Rather, with stock prices higher than their essential values, it is logical to expect the stock to adjust downwards. In addition, permanent losses don't always produce price drops. There can be other causes, including irrational investing and forced stock sales.

Now that you know what to avoid, it will be helpful to know that there are three factors that can produce permanent capital loss: valuation risk, financial risk, and earnings risk. To buffer your stock-market investments from the ill effects of these risks, consult with your financial analyst or investment planner.

About the Author:
Puritan Financial Group has years of experience in dealing important financial decisions. Puritan Financial Group will listen to you and your loved ones and craft a custom financial solution that supports your life goals.

Article Originally Published On: http://www.articlesnatch.com

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