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series of Peter Lynch investment strategy. And in this video, we'll be talking about the stocks that you need to avoid when you are building up your own personal portfolio. The first one is to avoid the hottest stock in the hottest industry. Now the main idea behind it is that everyone every investor hears about it and its stock can go up very fast mainly because of the optimism of the investors around the stock or the industry and because there's not much value or there's not much hope behind that stock it can go down just as quickly.
The one thing that to keep in mind while investing in the hottest industry is that this kind of industry often attracts a very smart crowd and entrepreneurs and venture capitals stay awake nights trying to figure out how to get into the act as quickly as possible. And because of this if someone has a can't feel idea but don't have any niche or a patent protecting that they are going to attract a lot of competition.
Now if there's a lot of competition in an industry it is very hard to find up a stock that could give you multibagger returns. For example, you can have examples lately and you will see that if there were only one or two main producer of this AI models uh that that they're providing to the people, you can easily invest in those and you you'll be very sure that their stock is going to go up.
But if we see that there is a lot of competition in the market and and because of that competition people are going to cut their cost just to get as much market share as possible. Now given all these scenario it will be very difficult for you to invest in a particular stock to to gain multibagger returns.
Second stock to avoid is is the stock that has been touted as the next something. So for example that company that is said to be the next Apple or the next McDonald's and these are the stocks that that you should be beware of because when it happens it most of the time it marks the end of the prosperity of both of the companies.
The imitator and the company which is it is compared to third is the company which diversify itself uh which actually spends money in versing its business operations. Now instead of buying back shares or increasing dividends what they do is they invest money or kind of waste money in the foolish acquisitions.
Now mainly they acquire businesses first which is overpriced and second uh which they barely understand. And when the diversification happens corporation mostly alternate between rampant diversification which is the acquiration of other small businesses and then rampant restrictions which is selling off the acquisitions at a lower price uh compared to the original price.
Now there are two good things uh for the investors here. First is owning the shares of the companies that is being acquired and second to find the turnaround opportunities among the victims uh that have been restructured. And one thing to understand is it's not always foolish to make acquisitions. So cons for this consider example of Bokshshire Hathway.
You might not have known about this organization if it had stickked to its textile business. it has be uh you know about this and it has become such a such a big conglomerate because of its acquisition only. So the only trick here is to know how to make the rout right acquisition and then manage them successfully.
And there's a term called synergy among among businesses. Uh which means is putting related businesses together and then making the whole thing work. And you can you can see it in example of let's say a a hotel chain let's say Marriott and it acquires some kind of restaurant change. Now these hotel chains and the restaurant business uh both of these are kind of related and if both of them come together and then work together is going to have a synergy between these businesses and these kind of acquisitions can make you a lot of money.
Now third point is to beware of the whisper stock. Now these are the stocks that are being told you by some friends or colleagues and these are on the brink of solving some of the latest national problems which can be curing cancer, drug addiction, oil shortage etc. Now this solution is either very imaginative or kind of complicated and these are the stocks that have kind of hypnotic effect on you and have a emotional appeal.
Now these are the stocks that have a great story but they don't have any substance to it that is they don't have a good business model and they don't have a good balance sheet. Now these are the stocks that you would hear at the time of IPO and it's often said that that by the IPO else it is too late and this statements in itself is rarely true because there are some of cases where early buying can give you fantastic profits in a single day but IPOs of brand new enterprises are very risky because they don't have a track record and you you have a very little info based on which you can have an educated guess that if the price that you are paying for that stock is undervalued or not.
So you will be better off investing in the IPOs of the companies that have been spun out of the other big companies because in this kind of situations uh you'll find a lot of track record of the new entity and you can have a better guess and the fourth is to beware of the middleman and when we when I'm talking about the middlemen so these are the companies that act as a producers of something uh for for other companies and they have majority of their business to a single company.
So for example just for example we can see of the Apple computers where the Intel as a company was the major producer of the Intel chips for these Macs. Now, now in this case, Intel might not have that much share of the Apple computers, but in general, if we see in a hypothetical situations that the 30 to 40% of the Intel Intel chips business came from the Apple or the Mac computers only.
Now, in this case, you never know when Apple starts manufacturing their own chips, which has happened recently. And in this case uh like 30 40% of the business of Intel has vanished in just a blink. Also uh the other thing that can happen is when Apple is the only source of business to Intel they can extract price cuts and other concession that will reduce the the Intel's profit.
And the fifth point is to beware of the stocks with a flashy name because the companies with an exciting name often attracts a lot of investors. And if a company is kind of mediocre or or a poor and don't have a strong balance sheet, this is just a recipe of disaster because a lot of people are going to invest just because of the kind of flashy name and don't and they don't want to have that kind of FOMO of not investing in this company and it is going to boost up the stock price and as there's no substance to it, it is going to go down just as quick it went up.
So this was a whole discussion about the stocks that you need to avoid. In the next video we'll be talking about the earnings and other factors that you need to look at while investing in a company. .
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