Stock Tips without Facts are Not Worth Much

It’s a sad fact that many stock purchases are sold to individuals for reasons that have little to do with the same everyday logic they apply when buying a car or a television set. Instead, there are calls by the broker to discuss the promise of a stock. Consideration as to whether a company has the management capability to marshal personnel and reach their promise or the financial capability to exploit their technological advantage is rarely discussed. That answer is not readily apparent. A great leader of a small company often is swallowed up when the company expands quickly.

Worse still is when a stock is referred to by a friend or relative aware of buzz about a new technology but unaware of how stocks grow earnings into capital gains. They are unaware if the product can ever be monetarized by shareholders into a meaningful stock gain. They are aware of the promise of the technology and how it could be useful. They are unaware, however, of the cost of creating and marketing a product or forecasting final demand and its price points.

Think Like the Professional Analyst

These are the types of issues the prudent professional analyst thinks about as he studies a stock. After assessing the realistic marketing potential of a small company, what is the path the company needs to follow in order to solidify themselves as a going concern? How much of the company has to be financed in order to grow the business in an orderly manner? Is the broad economic climate favorable to the fortunes of the new company? If the new product is part of a large multinational company will the additional revenue and profit be a meaningful addition to the existing earnings of the company?

The point is the casual or ordinary investor probably has neither the time nor the inclination to answer these or the many other questions required in a thorough investigation. The important issue is that it is often financial issues that determine the ultimate success of good ideas. Rarely can a technology be so overwhelming that it ‘makes’ the company successful.

If an investor knows their own limits then the investor should seriously consider using a form of passive investing – a mutual fund, a closed end fund or an exchange traded fund. After all, the purpose is to make money in the market – not cocktail conversation about the markets.

Especially with the vicious bear market we face it is important that the investments we make serve us with real value. Otherwise, don’t make the trade. Cash reigns as king.