The stocks you must never touch! Most big losses don’t come from bad luck – they come from buying wrong kind of stocks

They come from buying the wrong kind of stocks in the first place.That’s why, before we talk about what to buy, it’s more important to be very clear about what not to buy at all.

At Value Research Stock Advisor (VRSA), this is actually where we begin.

We have a clear sense of universes we simply don’t touch.

You can—and should—do the same with your own money.Take penny stocks.

The temptation is obvious.

“It’s only Rs 2.

How much can I lose?” The honest answer is: you can lose 100 per cent.

A stock trading at Rs 2 is not more “affordable” than one trading at Rs 2,000.

The absolute price means nothing by itself.

A Rs 2 stock can be horribly overvalued; a Rs 2,000 stock can be genuinely cheap for the quality of the business.Penny stocks come with a standard set of problems.

They are often thinly traded, which means you can happily buy, but you may find no one to sell to when you want to get out.

Information is scarce and unreliable.

A handful of players can push prices around.

If your main reason for buying is “it’s so cheap, I can buy thousands of shares,” that’s not investing.

That’s buying a lottery ticket.

In VRSA, we simply avoid this low-quality, illiquid corner of the market. We want to study real businesses, not play with scraps just because the sticker price looks small.This is where a real-life example is useful.

Think of a once-hyped penny stock like SecureKloud Technologies in the small cap IT space.

At one point in 2016, it traded around Rs 900 after a wave of promotional stories and “multibagger” claims.

A few years later, as the reality of weak profits and poor governance emerged, it fell to below Rs 50 by 2019 and currently trades at around Rs 25.

Anyone who bought in near the top is now sitting on a loss of roughly 95 per cent—even though the stock always looked “cheap” in rupee terms. This is exactly the pattern we try to help investors avoid.Then there are the “story stocks” and permanent “turnaround” stories.

These are companies that always have a narrative to sell.

They’ll tell you they are entering a hot new sector, or that they will be a leader in some buzzword industry in three years, or that they’re on the cusp of a massive turnaround.

The story keeps changing; the profits do not.Indian investors have seen this many times.

Think of some of the real estate and infrastructure favourites during the 2007-08 boom that never recovered, even ten years later.

Think of the supposed “next Infosys” names that went nowhere.

Think of the “conglomerates” that kept announcing new ventures and funding them with more and more debt.

At the peak, each of these had an attractive story.

Today, many of those stocks trade at a fraction of their old prices, if they are even alive.Take the case of Suzlon Energy, which once promised to be “the next big thing” in renewable energy space has surged 4-5x multiple times on hope and headlines, and then slid back when the promised turnaround never showed up in earnings.

The story was exciting, but the business never improved and to this date trades below its listing price which dates back to 2005.When we look at a potential idea in VRSA, we never start with the story.

We begin with the track record and the numbers.

If the economics are poor, a clever story doesn’t change anything.

A good narrative sitting on top of a bad business does not get past our filters.And then there’s the new favourite: F&O punting dressed up as “investing”.

Let me be blunt here.

Buying random options or taking leveraged futures positions because someone said “this is a sure shot” is not investing in stocks.

It is a leveraged bet on short-term price movement.F&O is dangerous because small price moves can magnify into big gains or losses.

Positions expire, which means time is always working against you.

You can lose fifty to a hundred per cent of your position very quickly, even when the underlying business is perfectly fine.

If you like trading F&O and know exactly what you’re doing, that’s your personal choice.

Just don’t confuse it with long-term equity investing.In our world at Value Research, F&O doesn’t feature at all when we talk about stocks.

We mean owning slices of real businesses for years, not renting volatility for a few days.You might ask, if these things are so obviously dangerous, why do so many people still get sucked in?

The answer is simple.

These traps promise speed, excitement and simplicity.

They promise that something will double in six months.

They give you something to talk about every day.

They tell you not to overthink—just act now.Real investing is the opposite.

It’s often slow and sometimes boring.

It doesn’t give you new bragging rights every evening.

It asks you to think carefully about businesses, risks and your own behaviour.

At VRSA, we deliberately choose boredom over drama.

We are perfectly comfortable if nothing spectacular happens to a stock for three to five years, as long as the business quietly keeps compounding underneath.You don’t need advanced jargon to protect yourself.

A few personal rules will do the job.

If the main pitch is “it’s only Rs 10, buy a lot of shares,” walk away.

If you can’t explain in a couple of sentences what the company does and how it earns money, walk away.

If the story around the business keeps changing every year, walk away.

And if the idea depends on leverage, exotic products, or you being forced to “act today”, again, walk away.The market will always have something thrilling to offer you.

Your job is not to chase everything that sparkles.

Your job is to protect your capital and let it grow steadily.

That begins with cleaning up your investment universe.

If you simply stop buying the wrong kind of stocks, you’ve already taken a huge step towards becoming a better investor.

The rest—how many stocks to own, how to size them and how to diversify—is actually much easier once this first step is in place.(Ashish Menon is a Chartered Accountant and a senior equity analyst in Value Research’s Stock Advisor service.)