UncategorizedInvestment Fundamentals: Spotting Scams and Picking Winners

February 22, 20210

Investment Fundamentals:

Spotting Scams and Picking Winners

At Heritage Wealth Partners, we believe in empowering our clients to understand their investments and make better financial decisions. We encourage people to learn about investing with smaller amounts in a risk-managed way, while leaving the large amounts to the professionals, just in case.

So, we’ve decided to dedicate one article per month to tackling some of the more common questions we receive from clients. If you have a specific question you would like us to answer, please contact us directly and we will endeavour to answer it.

I’ve heard a lot about investment scams. How will I know that something is legitimate before I invest?

Indeed, one never has to look far to find people trying to fraudulently enrich themselves at the expense of others. It happens on a small scale continuously, with an occasional mega-fraud that rocks the market.

The latest example is Mirror Trading International. To make it worse, regulators issued warnings to investors about this scam yet many chose to ignore the red flags instead, believing that “the system” is against them and that “the government” is trying to stop them making money.

The regulators exist for a reason. They want to protect ordinary South Africans from being taken for a ride. But you can’t always rely on the regulators picking up an issue before you invest, as they only get involved when something is large enough to attract their attention.

To protect yourself, you should ask questions like:

  • Does this return seem reasonable?
  • Where is the money being invested?
  • Is the entity an authorized financial services provider?
  • Does it have a long-standing reputation?
  • How are the products being marketed?

Remember, an average year on the JSE returns 12% – 15%. Of course, in a great year and with the right stock picking strategy, it’s possible to generate much better returns. 

Scams often promise a high return per week which is simply not possible to guarantee, as markets rise and fall and experience volatility. It’s always a red flag when returns on offer are high and regular.

It’s also critical to find out where your money is going. Scams usually have long-winded and opaque explanations, based on “trusting them” rather than seeing underlying fact sheets. Instead of investing in listed instruments on a regulated exchange, many of these scams focus on forex, crypto or even both!

Finally, trust your gut. If it feels questionable, there’s a good reason for that. 

What do you look out for when investing in a company?

Although investing in shares is a complex topic and there are numerous valuation techniques available, certain principles apply that can be easily understood by anyone.

The sagely advice of “cash is king” matters here. Investors look for cash flow, either now or in the future. Mature companies typically convert profits into cash flow without much capital investment in the middle, whereas growth companies need to invest their profits back into the business.

In this exciting new world of tech platforms, many investors are looking for user and revenue growth above all else. The theory is that the profits will come once the company has dominated a particular niche. Sometimes this works well (e.g. Amazon) and sometimes it doesn’t (e.g. Uber). 

It’s also sensible to look for companies with an established and incentivised management team. Founder-led companies are favourites of ours because the management team has skin in the game. They focus on increasing the share price value rather than earning big bonuses.

Common sense is another useful weapon in your arsenal. 

Just by considering how your own preferences and spending habits are changing, you might be able to identify important trends. We’ve seen good results locally out of companies like Italtile, Cashbuild and Trellidor, because people are investing more in their homes. Gaming is an exciting global theme, driving strong share price gains in companies like Nvidia and Tencent. 

The best thing you can do is read as widely as possible. You’ll soon pick up many of the tricks and themes that help professionals pick winning stocks. 

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