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Here’s what investors can learn from Navitas Limited’s wipeout

On Wednesday, as was outlined here, shares in education provider Navitas Limited (ASX: NVT) ended the day down a whopping 31% after being released from a two-day trading halt and updating the market on a significant contract loss.

Determining the exact effect on earnings of this contract loss is hard to immediately decipher, however Navitas’ management did state that the company will take a one off, non-cash impairment charge of up to $40 million. Given the market sliced close to $800 million off the company’s market capitalisation it would appear investors are certainly viewing it as a significant loss.

The other day I posed the question: “Is another GFC crash coming?” The crux of this comment was not about ascertaining the likelihood of a crash or timing the market, but rather how best to protect your portfolio if it was to happen. I suggested that the best form of protection was by not overpaying for the stocks you buy. Indeed it’s a keen focus on valuation and the avoidance of overpaying that has helped investors such as Warren Buffett and Kerr Neilson from Platinum Asset Management Limited (ASX: PTM) become billionaires.

Learn from the misfortunes of others

One of the great things about investing is you can learn from the mistakes of others and thereby hopefully avoid making them yourself. Arguably, shareholders in Navitas have just had a serious wake-up call about the dangers of owning stock in expensively priced companies when they take a stumble. As it turns out, just last week I singled out four stocks which I felt looked expensive – Navitas was one of them. My view on the other three, namely Commonwealth Bank of Australia (ASX: CBA), Tabcorp Holdings Limited (ASX: TAH) and Domino’s Pizza Enterprises Ltd (ASX: DMP) hasn’t changed.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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