Hold Em and Fold Em

 

When most analysts, financial planners, fund specialists and investors try to decide whether to buy a particular stock they immediately go to the financial statements to determine the growth potential of the company. Numbers and more numbers. Then management analysis and industry speculation. Unless you are an experienced financial analyst (and there are not very many good ones) the numbers in the reported statements can be very misleading - just as the company Controller wants them to be.

Let's not consider fraud as there has been plenty of that both here and abroad. They are all honest (I hope). Most corporate executives want to remain within the law so they report statements that are true to the FASB - Financial Accounting Standards Board.

As the old saying goes, "Numbers don't lie, but liars can figure". If you are good with accounting techniques you can make a bankrupt company look good - on paper. On CNBC-TV many folks watch the CEOs telling a great story about their company. You sure don't expect them to tell you the whole truth and nothing but the truth, do you? That is why I always hit the mute button. And many times when you look to see what the insiders are doing in this wonderful (?) company this executive and his buddies are selling out.

Then there is Morningstar that gives us those twinkling heavenly bodies. Nothing like a 5-star mutual fund - that has lost money for the past 4 years. So much of their information is old and if they know it you can be sure that has already been factored into the current price. How about those peer groups? Suppose this particular peer group is ranked 99th out of 100 or even 15th or lower. One question: why do you still own it?

Why are you putting your money in the stock market at all? The idea was to make more money. Right? Yet the majority of little investors will hold a stock or mutual fund while it goes down and down. Wouldn't it make more sense to sell out once it loses a certain percentage from its highest price after you buy it? If you bought it at $20 and it is now $40 is it now time to sell? I don't know so why not let the price action tell you. If you only wanted to risk 10% when you bought your stop-loss would have been $27. It now should still be 10%, so you will be out at $36 if it starts down. Suppose you tracked that stop all the way up to $80? This is why I have always preached that stops make you money.

The best (?) analysts know very little more than you. They just have a bigger vocabulary about the market. You and your dart board can do as well. All any truly smart investor needs is common sense and the ability NOT to fall in love with any position. Know when to hold 'em and know when to fold 'em.

Copyright 2005

 



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