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VERSACE: Knowing when to say no

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Most if not all investors in the stock market are concerned with picking winning investments. After all, they are spending time researching potential investments and paying trading commissions with the goal of growing their capital. Sometimes that capital appreciation happens quickly and other times it takes time for an investment to pan out. As tends to be the case, every so often it doesn't pan out at all. If you've ever met someone who has invested in stocks or you are that person, then you know that they like to talk all about their winning positions and prefer not to mention those that cost them.

With so many companies on the various stock exchanges, one of the toughest challenges is to say "no" to a stock. It's especially difficult if the company produces a product you like (or even love) or if said company is the hyped story of the day. The most recent example of the latter is Facebook, which counts hundreds of millions of users but the stock has been a disaster for early post-initial public offering investors. Since going public, the shares have fallen from the IPO price of $38, bottomed at $17.55 and closed Thursday at $22.59. Not bad if you got bought your position in early September, but if you built your position in May, June or July you are down considerably.

Facebook is but one example -- there are many others out there. And this means investors need not only identify the opportunity but also its associated risks. If the reward out weights the risk, then the likelihood of success is far greater than if the risk out weighs the reward.

How do investors, particularly individual investors, identify the risks associated with a company and its shares?

The short answer is do your investing homework, which means poring over company financial statements, digesting filings with the Securities Exchange Commission, and reading press releases and anything else you can get your hands on. After that a savvy investor would then do the same for a company's customers, suppliers and competitors. No shortage of reading and understanding not to mention calculating the fair value of the stock or security.

At the same time, we have to be aware of what disruptors may be on the horizon. Generally speaking that takes the form of technology, but it can be the found in other forms of innovation. One of the best examples is how Apple Inc. has continually disrupted industry after industry over the last few years. With its iPod, iPad, iPhone, Apple TV and most importantly iTunes products, Apple has changed the way people buy and consume content. Music. TV shows. Movies. Books, text books and magazines. Software. Games and more. As one would expect given Apple's install base, this has had a ripple effect in a bad way across those aforementioned industries and the companies that serve them.

Past industry leaders, like mobile-phone leader Nokia Corp. and email-device manufacturer Research in Motion Ltd. (of BlackBerry fame), have been dethroned. The music industry has struggled to find its way since hit singles were decoupled from full CDs. The shift to tablet computing that has gone mainstream thanks to Apple's iPad dealt another blow to struggling PC manufacturers Dell Inc. and Hewlett-Packard Corp. Another example can be found in Apple's new Passbook wallet solution has the potential to disrupt couponing, ticketing, mobile payments and more.

Apple is but one example and there are many others, including Google Inc.,, Inc. and Twitter quickly spring to mind on the tech front. Disruption can also been had in industries other than technology and Coca-Cola's new Freestyle machine is a good example.

Investors need to understand the impact of these innovations and assess the impact their disruptive wave will have to their investment holdings. That means not only watching, digesting and dissecting the data points that are around us each and every day, but understanding how they fit into the larger investing puzzle.

• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletter. Visit them at or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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