it will happen without you saying stock market disadvantages Hurt. Loss is not good with our mind. There are proven psychological studies around this. It is believed that we humans feel the pain of loss twice as intensely as the same pressure of gain.
And this pain or fear is not without reason. For example if you lose 50% in a stock, you need to invest in a 2-bagger to make a profit on that amount. If you lose 80% in a stock, you need a 5-bagger to break even on that amount.
And god help you if you lose 90% in a stock. You would need a 10-bagger to get back your original investment.
Is it any wonder that people are so loss averse when it comes to investing?
So, how do you minimize losses in investing? I’ll be honest with you. It is impossible to have a completely lossless portfolio. Losses are part and parcel of investing, especially if you have been investing for a long time.
Therefore, eliminating the deficit altogether is like living in a fool’s paradise.
But you can do something else. You can try to cut your losses. You can try to keep your losses to a minimum so that they do not cause major damage to your long term portfolio.
One of the best ways to do this in my view is to avoid toxic stocks. Yes, you heard that right.
If you want to prevent massive wealth destruction, stay as far away from toxic stores as possible.
Now the question is what exactly are toxic stocks and how do you identify them?
Well, there is no universal definition of a toxic stock. Each investor can define it the way he wants.
However, as far as my definition is concerned, toxic stocks are stocks that are overpriced, have weak balance sheets and are often loss-making.
Let me repeat that.
Toxic stocks are stocks that are expensive, have weak balance sheets, and are often loss-making.
In fact, this isn’t the first time I’m talking about toxic stocks. MyFirst video on Poison StockWent live on 6th January this year.
In this, I termed the following stocks as toxic and asked investors to stay away from them.
Here is the complete list for you.
It has 22 names, ranging from Adani Green Energy to Wockhardt Limited.
These toxic stocks were shortlisted based on the 3 criteria that I just highlighted, ie expensive valuations, weak balance sheet and loss-making operations.
I recommend that youWatch video of 6 JanuaryIf you want to get full details of how I shortlisted these stocks.
Anyway, let’s discuss the performance of these stocks today.
You see, out of 22 stocks so far in 2022, 12 stocks have destroyed investors’ wealth while the remaining 10 stocks have given positive returns.
The biggest loser, Tata Teleservices Ltd is down nearly 60% so far in 2022, followed by Vodafone Idea, SpiceJet, Wockhardt and others.
In terms of gains, Adani Power which we labeled as one of the 22 toxic stocks has done a complete U-turn. Instead of falling, the stock price has skyrocketed and generated nearly 230% returns for investors in 2022.
So, what do we make of these numbers? Was it right to label these stocks as toxic stocks or did I mislead investors and make them miss strong performers like Adani Power, Lemontree Hotels and Swan Energy?
Well, if you had invested Rs 100 in each of these stocks right after publishing the list, you would have earned a positive return of around 11% so far in 2022.
This is much better than the 2% return earned by the Sensex during the same period. Therefore, it would be safe to say that my portfolio of 22 toxic stocks would have outperformed the benchmark index.
Well, toxic stocks were there to destroy investor wealth and not create it.
However, this toxic stock portfolio increased investor wealth by 11% and even outperformed the index.
Hence you can say that collectively these stocks have not turned toxic at all. In fact, they have proved to be market beaters.
So, has my list of toxic stocks failed? Should I discard it and come up with better rules for shortlisting these stocks. OK, not so fast.
We compared the performance of the toxic stock portfolio with Sensex and realized that my toxic stock portfolio earned 11% returns as compared to 2% by Sensex.
But what if we remove the outsider i.e. Adani Power. As you see, Adani Power was the best performing toxic stock in 2022, up more than 3x. However, if you remove Adani Power from the list, the portfolio returns drop from 11% to just 0.6%.
I know some of you must be wondering whether it is fair to spin off Adani Power. After all, it is equivalent to changing the facts to suit my theory rather than changing my theory in response to the facts.
Let’s take a look at the table below and then find out whether my decision to ignore Adani Power was wrong.
Which of the two companies do you think you would be more comfortable investing in? I think most of you would go with Stock A if you believe in the principles of sensible, long-term investing.
Ultimately, Stock A has a more predictable earnings profile, lower debt and, above all, a more attractive price. Stock B, on the other hand, looks like a speculative bet because its historical fundamentals are not up to the mark.
Well, let me tell you that both of the stocks areTop power stocks in India.
Stock A is none other than power sector giant NTPC while Stock B is Adani Power.
Adani Power, as you all know, was one of the toxic stocks for 2022 and still has a whopping 230% gain during the year. NTPC, on the other hand, has outperformed the benchmark index in 2022 by a significant margin and is up nearly 40% this year. However, it is still well below Adani Power’s impressive outing in 2022.
Does Adani Power’s Outperformance In 2022 Make It A Better Investment Than NTPC? I do not think so. I believe that returns alone do not convert a poor quality stock into a good stock. For a stock to qualify as a good quality one, it must have a long track record of sound earnings and sound financials.
So, even though Adani Power has outperformed NTPC on a broad spectrum, I would be happy to buy 20 stocks with fundamentals similar to NTPC rather than own a 20-stock portfolio with similar characteristics to Adani Power.
The latter is a toxic portfolio in my view and turning one stock into a 3-bagger doesn’t change my view.
So, I thought it would not be wrong to analyze the performance of Poison portfolio after removing Adani Power.
The fact that it delivered 230% returns doesn’t suddenly turn it into a fundamentally strong company. Exiting the Poison Portfolio list would have to reflect an improvement in the company’s performance for a few years.
Keeping this important thought in mind, the time has come to unveil the Venom Stock List for the year 2023.
Here are the stocks from BSE 500 universe which I think can be dangerous for your portfolio in 2023.
Barring a few new stocks, the list has almost the same names as in 2022. Please note that this is purely my interpretation of Poison Stock. Please feel free to have your own parameters for poison stocks and to include or exclude some stocks from this list as you see fit.
As far as I am concerned, there is little chance that I can recommend stocks from this list to my clients in the next year or two. After all, the first rule in investing is not to lose money and the second rule is to always keep the first rule in mind.
(Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be construed as such.)
This article is syndicated equitymaster.com
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