Markets are bouncing. Some call it a yo-yo market. Others call it a kangaroo since we like to use the animal spirits to describe what’s going on.
But whatever you call it, the volatility can be gut-wrenching and get you thinking more about doubling down on Tums and Mylanta than doubling down on any stocks.
And since volatile markets can be a scary place and also a place ripe for manipulation, I wanted to take today to continue the theme I started earlier this week…
So we’re going to talk about more things to avoid when investing.
And this time, we’re looking outside ourselves and into the companies we’re investing in to cover five "red flags" that could ruin your retirement…
Red Flag #1 — Foggy Numbers
Lack of transparency in financial reporting and business operations should be a huge red flag for investors.
It often indicates a lack of accountability or unethical behavior permeating the corporate culture.
Companies that are not forthcoming about their financial information, operations, or future plans can be a big sign of trouble, and this can make it difficult for investors to make informed decisions.
A good (or bad) example of a time when a lack of transparency led to disaster for investors is the Enron scandal.
I’m sure everyone remembers how that played out, but I’ll give a brief summary in case you forgot…
Enron was an energy company that was notorious for its lack of transparency in financial reporting and business operations.
The company used accounting tricks to hide its debt and present a more favorable financial picture to investors.
When the truth was revealed, investors lost billions of dollars and many people were left unemployed.
To watch out for this red flag, investors must review financial statements and other public information extremely carefully.
They also need to be extra cautious of companies that have a history of restating earnings or have faced regulatory action.
Investors should also look for companies that provide regular, detailed updates about their business operations, financial performance, and future plans.
Companies that are open and transparent about their operations and financial information are typically more trustworthy and can be better investment opportunities.
Red Flag #2 — Get Me Outta Here!
When insiders are selling a company stock, that’s another BIG red flag for investors.
It often means that those close to the company, such as its executives or directors, have a negative view of the company's future prospects.
When insiders sell their shares, it can be a sign that they believe the stock price will soon decline or that they have lost confidence in the company's ability to perform well in the future.
And if the insiders don’t have confidence in their own company, why should you?
An example of a time when insider selling led to disaster for investors was the dot-com bubble of the late 1990s.
During this period, many tech companies saw their stock prices soar as investors rushed to buy shares in the hottest new companies.
However, as the bubble burst, many of these companies saw their stock prices plummet, and many investors lost a significant portion of their savings.
Some of the worst losses occurred when company insiders, who had cashed out their stock holdings, left other investors holding the bag.
To watch out for this red flag, investors should regularly monitor insider trading activity, which is publicly disclosed by companies.
Investors can also use tools such as insider tracking websites or consult with financial advisers to help them stay informed about insider trading activity.
Additionally, investors should pay attention to the overall trend in insider selling activity for a company, as well as the reasons for any specific transactions.
In general, a high level of insider selling, especially when combined with other red flags, can be a warning sign for investors to exercise caution.
[Side note: My colleague Alex Boulden intensively tracks insider buying and selling across the markets for members of his investing community. He’d be happy to help you too, and even offered a discounted membership for anyone reading this article.] Join Wealth Daily today for FREE. We’ll keep you on top of all the hottest investment ideas before they hit Wall Street. Become a member today, and get our latest free report: “How to Make Your Fortune in Stocks”
It contains full details on why dividends are an amazing tool for growing your wealth.
Join Wealth Daily today for FREE. We’ll keep you on top of all the hottest investment ideas before they hit Wall Street. Become a member today, and get our latest free report: “How to Make Your Fortune in Stocks”
Red Flag #3 — There CAN'T Be Only One
Overreliance on a single product or customer is one more red flag that investors should keep an eye out for.
It can indicate that a company is vulnerable to business disruptions or changes in market conditions.
Companies that rely heavily on one product or one customer for a significant portion of their revenue are at risk if that product or customer experiences problems.
Just think: If a company's key product becomes outdated or if its largest customer experiences financial difficulties, the company's revenue and earnings could be absolutely crushed.
Thus is the story of Eastman Kodak. And it ended in disaster for investors when the company declared bankruptcy.
You see, Kodak was once a dominant player in the film photography industry, but as digital photography gained popularity, Kodak struggled to transition to new business models and products.
Kodak was heavily reliant on its film business and was unable to respond quickly enough to the changing market, which ultimately led to its bankruptcy.
To watch out for this red flag, investors should review a company's revenue sources and product offerings.
Investors should look for companies that have a diversified product line and a diversified customer base, as these companies are typically less vulnerable to business disruptions.
Additionally, investors should pay attention to any changes in a company's product mix or customer base, as this can indicate potential problems.
Red Flag #4 — Borrowing From Peter to Pay Paul
A high level of debt is yet another red flag for investors because it can indicate that a company is financially stretched and may struggle to repay its obligations.
When a company has a large amount of debt, it must allocate a significant portion of its revenue to repay interest and principal on its loans, which can limit its financial flexibility and ability to grow.
If a company is unable to manage its debt, it is likely to face financial difficulties, such as bankruptcy or restructuring, which often results in massive losses for investors.
An example of a time when high levels of debt ended in disaster for investors was the 2008 financial crisis.
Leading up to the crisis, many companies, especially those in the financial and real estate sectors, had taken on significant amounts of debt to finance their operations and growth.
When the housing market crashed and the financial system was thrown into turmoil, many of these companies were unable to repay their debt and went bankrupt, resulting in significant losses for investors.
To watch out for this red flag, investors should review a company's balance sheet and look at its debt-to-equity ratio.
A debt-to-equity ratio that is higher than the industry average or that increases over time can indicate that a company is taking on too much debt and may be at risk of financial difficulties.
Investors should also look at a company's ability to generate enough cash flow to repay its debts, as well as its track record of managing debt and interest payments.
Red Flag #5 — That Just Doesn’t Add Up
A company having accounting irregularities or questionable financial practices should be another major red flag for investors.
It often indicates that a company is not providing an accurate and transparent picture of its financial performance and health.
When a company has accounting irregularities or engages in questionable financial practices, it may overstate its revenue or profits, understate its expenses, or use other tactics to manipulate its financial results.
When these practices are discovered, it leads to a big loss of investor confidence, regulatory investigations, fines, and sometimes even bankruptcy.
An example of a time when accounting irregularities ended in disaster for investors was the WorldCom scandal in the early 2000s.
WorldCom, a telecommunications company, was found to have falsified financial reports to make its earnings appear stronger than they actually were.
When this deception was finally uncovered, the company's stock price plummeted and it eventually declared bankruptcy, resulting in significant losses for investors.
To watch out for this red flag, investors should review a company's financial statements, including its income statement, balance sheet, and cash flow statement.
They should look for any unusual or unexpected changes in the company's financial performance, such as rapid increases in revenue or profits, or large one-time charges.
Investors can also read analyst reports, research the company's industry and competitors, and look for any regulatory or legal actions related to the company's accounting practices.
The Bottom Line
The bottom line here is that investors should be on the lookout for red flags when investing in a company or stock to avoid potential losses and ensure that their investments are safe and secure.
These are just a few of the biggest red flags investors need to watch out for.
There are many more, but by paying attention to these red flags, you can better evaluate the financial stability and future potential of a company and make informed investment decisions.
So when any one of these pops up in your analysis of a potential investment, it should give you reason to pause and reassess.
But when all of them pop up on one potential investment, it should give you reason to turn, run away, and never look back.
You’ll have to pay close attention, though…
Companies can do a lot to hide these red flags from investors. And they’ll pull out all the stops to convince you they’re not red flags but, in fact, rose-colored pennants.
And that’s why you need independent commentary like the kind you get here at Wealth Daily and our sister sites, Energy and Capital and Outsider Club.
We’re not beholden to any billionaire owner. And we NEVER take money from the companies we cover.
We tell it like it is, how we see it, and no other way.
And we’ll keep doing that as long as you want to read about it.
So keep your eyes out for more. And have a great weekend!
To your wealth, Jason Williams After graduating Cum Laude in finance
and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private
sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team
responsible for billions of dollars in daily trading. Jason left Wall Street to found his own
investment office and now shares the strategies he used and the network he built with you. Jason
is the founder of Main Street
Ventures, a pre-IPO investment newsletter; the founder of
Future Giants, a nano cap investing service; the editor of Alpha Profit Machine, an
algorithmic trading service designed specifically for retail
investors; and authors The Wealth Advisory income stock
newsletter. He is also the managing editor of Wealth
Daily. To learn more about Jason, click here.
To your wealth,
After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter; the founder of Future Giants, a nano cap investing service; the editor of Alpha Profit Machine, an algorithmic trading service designed specifically for retail investors; and authors The Wealth Advisory income stock newsletter. He is also the managing editor of Wealth Daily. To learn more about Jason, click here.