One of the greatest mistakes inexperienced investors make is in buying cheap stocks just because they are selling at a low price. Price itself is not an indication of cheapness.
In selecting stocks, it is important for an investor to understand which industries are in the strongest position, which are less strong and which are comparatively weaker or very weak.
Investors must first come up with a list of strong stocks. It’s like a shopping list of stocks to have. And for companies in weak industries, avoid them altogether. No matter how cheap they are. Because when a declining movement comes, stocks in these weak industries are the first to be let go. When the market eventually recovers, they will also be the ones who do so with the greatest difficulty.
On the other hand, another mistake is to be buying good stocks, but at too high a price. They are not willing to buy when the price of a good stock goes down, but they buy mostly when it is going up and almost near the top.
The right way to do all this is to simply choose the strongest companies of the strongest industries and buy them when they are mispriced too cheaply.
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