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The Most Common Investor Mistakes that Conscious Investor Avoids
How Conscious Investor Could Have Saved Investors Billions of Dollars

By John Price, Ph.D.

Finding quality, profitable investments or avoiding mistakes that cost you money: which do you consider the more important? Many people write and tell us that avoiding costly mistakes is what worries them more. The possibility of seriously reducing your retirement nest egg is one example that causes anxiety.

When it comes to investing mistakes, they fall into two categories, subjective and objective. Subjective mistakes are due to fuzzy thinking and behavioral biases. Objective mistakes are due to not understanding what are the drivers of profitable companies or to not recognizing danger signs in a company.

Fuzzy thinking and behavioral biases

You can see a range of subjective mistakes including Get-Evenitis, Consolidated Profitus and Tradophilia in the articles Get-Evenitis and Other Investor Maladies and More Investor Maladies: The King Kong Syndrome and Tradophilia. For example, Get-Evenitis is the disease of usually holding onto your stocks whenever they go down in price irrespective of whether or not they continue to be investments that are likely to bring healthy returns.

I call them chronic investor diseases. Like chronic diseases in the area of health, it is often hard to put your finger on the precise problem. You just know that something is wrong but it is hard to describe what it is and often even harder to treat.

Conscious Investor will help you diagnose and treat these diseases. And, most importantly, it will strengthen your (investment) immune system so that you won't contract it again.

Lack of proper screening and evaluation methods

Objective mistakes are based in not having the ability to screen the market and not knowing what to do to evaluate the likely success of businesses. In Conscious Investor® this is done in a systematic way. First of all there is a preliminary screening or filtering on the level of the sectors or even the whole market. This is done in a few seconds using the database of all the listed stocks on the AMEX, NYSE, NASDAQ, as well as the Canadian and Australian exchanges.

This quickly weeds out from 95 to 98 percent of companies. For example, a common investor mistake is to buy stock in companies with excessive debt. For example, as we will see in the table below Enron would not have passed this level of filtering because of its high levels of debt with its debt actually exceeded the equity of the company in many years.

Another mistake of investors is to invest in companies with low return on equity. For example, Warren Buffett looks for companies with a high return on equity and little or no debt.

This mistake is avoided as part of the next analysis which considers the current and historical financial position of the remaining companies in six areas: management, growth, debt, liquidity, payout and price-earnings ratio. This is done very quickly and thoroughly through a series of six charts. Whether companies pass these criteria at the present time as well as over the past years is vitally important before you would consider investing in it.

Avoiding companies before fraud is detected

The filters of Conscious Investor are so powerful that they helped to avoid companies such as Enron, WorldCom and Tyco before the fraud they committed was detected. It is not that Conscious Investor itself uncovers the fraud. Rather, there are generally other actions associated with fraud and criminal activity of companies that bars the companies from being suitable investments. The following table shows the examples of Enron, WorldCom and Tyco.

Description of Fraud
Conscious Investor

In late 2001, Enron revealed it would incur losses of at least $1 billion and would restate its financial results for 1997, 1998, 1999, 2000, and the first two quarters of 2001, to correct errors that inflated Enron's net income by $591 million. The impact of this restatement was enormous as Enron's stock dropped 91%. Soon after, Dynegy Inc.'s attempted acquisition of Enron fell through, Enron's debt was downgraded to junk bond status and its stock dropped to just $0.26 per share. On December 2, 2001, Enron filed for Chapter 11 bankruptcy.

Total cost to stock and bond investors: $74 billion from the company's peak valuation

In the six years prior to the announcements of the situation with Enron the company had an average debt to equity ration of 107.8%. Also it had an average return on capital of 6.12%. Both these measures would ensure that Enron would not be an acceptable company to invest in according to Conscious Investor filters.

Executives at telecommunications giant WorldCom perpetrated accounting fraud that led to the largest bankruptcy in history. The fraud was revealed to the public in June 2002 and WorldCom filed for bankruptcy in July 2002. Evidence shows that the accounting fraud was discovered as early as June 2001, when several former employees gave statements alleging instances of hiding bad debt, understating costs, and backdating contracts.

Total cost to investors: $107 billion.

One of the areas that Conscious Investor focuses on is stability in the growth of earnings and sales. Earnings for WorldCom were extremely unstable during the 10 years prior to the announcement of the investigation. (From a technical perspective, they had a STAEGR of 20.8% [details].) Also over the same period the company had a return on equity of 5.63%. In both cases this would block WorldCom from having the potential of a "wealth creating" company.
During 2002, the Securities and Exchange Commission began an investigation of Tyco's top executives. Inquiries into the accuracy of the company's books began in January. As investigations continued it was uncovered that Dennis Kozlowski, Tyco's former CEO; Mark Swartz, Tyco's former CFO; and Mark Belnick, the company's chief legal officer, had taken over $170 million in loans from Tyco without receiving appropriate approval from Tyco's compensation committee and notifying shareholders. In July 2005 Kozlowski and Swartz were found guilty of stealing more than $150 million from Tyco.. The case of Tyco is not as clear cut as those of Enron and WorldCom. Nevertheless, the evidence shows that Tyco would not be a company for "conscious investors". For example, its average return on equity over the years 95-99 was only 9.82%. Also its earnings stability from 1995 to 2001 was 76.9%.

Putting it simply, if investors had run Enron, WorldCom and Tyco through Conscious Investor before deciding to buy the stock, they would not have gone ahead with the purchases and consequently would have saved themselves billions of dollars.

Avoid the publicity-seeking braggarts

Another danger sign is when the CEO pushes to get publicity for his or her successes to an excessive level. Sometimes it can be just small signs that tip you off. For example, Jeff Skilling, the former CEO of Enron, drove a black luxury car with a license plate that reads "WLEC". Translation: World’s Leading Energy Company. In contrast, the number plate of Warren Buffett's car reads "THRIFTY".

Conscious Investor helps you avoid these mistakes

The important outcome is that Conscious Investor provides the framework and tools to avoid these and other common and not-so-common investor mistakes. And it can even help you avoid what is feared by most investors, putting your money in a company where you later find out has management that's engaged in fraudulent and criminal activity. You can see how effectively it does this in any of the free videos.


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