5 Ways to Avoid Getting Creamed by Falling Markets - Part 2

Part 2 of 2

4. Look for hidden landmines in a company’s financial statements

Airlines looked wonderfully profitable back before deregulation. Construction firms appeared to bring owners fountains of cash before asbestos. Textiles once made shareholders very rich. Look for where you think capitalism is going to take away major sources of wealth. Personally, it is my own opinion that I’d be nervous owning shares of video rental chains given that it appears the Internet will make digital delivery of content the wave of the future – why drive to a store when you can simply click a button to see the newest Hollywood blockbuster? Could I be wrong? Absolutely. But in my own assets, that’s not a risk I’m willing to take.

On the same note, you should look for hidden assets. What if you found a chain of video rental stores that owned the real estate? In that case, you could find a company that was trading at a going-out-of-business price yet get far more value because of these sources of value that aren’t factored into the price by shareholders, analysts, or other professionals.

5. Never invest unless you have a backup, emergency source of liquidity

No one knows what tomorrow brings or holds. Financially, if you want to remain on stable footing in good times and bad, it is wise to maintain a backup source of liquidity, preferably liquid cash, that can be immediately and unquestionably accessed in the event of an emergency. What if a car hits you? Or you lose your job? Or find out that your employees have been stealing from you and your vendors haven’t been paid? Or you come home to find your spouse is leaving you and they have already drained the joint accounts? Regardless of the situation, prudence dictates it wise to immediately, and unquestionably, have the ability to solve the problem. For many people, a pristine credit score along with a personal line of credit should be sufficient.