Times When It Is Okay To Buy “Bad” Stocks

In determining whether to purchase a stock however, there are a myriad of things to consider and this is where the real game of investing lies. Sometimes, it is as easy as not purchasing stocks that have bad issues surrounding them.

Depending on how you choose to look at investing in stocks, it can be really straightforward: You simply buy when the price of the shares of a company in your portfolio is low, and when it increases in value, you enjoy the increment – which could be very exponential.

In determining whether to purchase a stock however, there are a myriad of things to consider and this is where the real game of investing lies. Sometimes, it is as easy as not purchasing stocks that have bad issues surrounding them.

Bad in this regard could mean a company that has been retrogressing over the past 2-3 years, one with issues around fraud, and so on. But this is the real difference between private equity companies and regular investors.

Many private equity investors purchase huge stocks in companies that are crashing. The idea is to be able to purchase their shares at a small fraction of what they are truly worth, put their funds into turning the company around, and then enjoying the gains that come out of the entire process.

However, not all companies can be turned around. Same goes for you as a regular investor. While there is gain in being able to buy at a good rate, there too is a high risk that comes with buying stocks that have issues surrounding them.

Here are some ways you can tell if it’s okay to buy the exact stocks that a lot of people are running from.

Are the issues surrounding the stock capable of being solved?

Every company has times when issues arise. It could have working capital challenges, be highly leveraged, lose core equipment to fire breakdowns, have a litigation issue, be involved in a fraud case, have a new competitor in town and so on.

The list is truly endless. However, while some issues can be solved, others can’t. In the same regard, while some companies are strong enough to bounce back in challenging times as these, some others fail.

Just like the private equity companies take their time to analyse the potential of the companies they buy into, projecting their expected gains based on the company’s market ownership and the economic landscape itself, you too must be able to carry out a comprehensive analysis of any stock that seems chaotic that you are considering adding to your portfolio.

If the issues being faced by the company can be solved by a change in management or any other such steps you can see the company already taking, then you can go for it.

Do You Believe In The Potential of the Company

As cliché as this sounds, the one thing that would keep you interested in a seemingly bad company is if you believe that the company will get better. This belief doesn’t come from a place of hope or sentiment for what the company does.

Rather, it comes from a place of conviction. This conviction comes from a place of knowledge. What is the track record of the management and how well do you trust them?

If after reviewing the company’s track record you think there’s a chance that things will get better based on its management or what it stands for, then you might just stick your gut out and do it.

You Can Wait

And the wait could be long. Turning around a company could take a long time. It might need to go through a merger and acquisition phase; it might need to expand to new areas and so much more.

Can you handle the idea of the price of the company falling further in value over the next few months without panicking and pulling out your funds? You must know if you can forget about the funds invested for a while.

If you can wait and you can trust the potential of the company and its ability to change things for good, then you just might be rewarded richly.

Written by Lawretta Egba.