I want to continue a theme I started two weeks ago with a post titled “Making the Minimum Credit Card Payment” and followed-up last week with another post called “Choosing Weak Balance Sheets and High D/E Ratios.” I know some of you read the  May 27 Bloomberg piece linked next because you wrote me about it this past week (Thank you for that):

http://www.bloomberg.com/news/2014-05-26/bad-credit-no-problem-as-shares-of-balance-sheet-bombs-rise-94-.html

I won’t repeat the content of the article but do encourage you to read it if you have not already. For a risk averse investor like myself who wants to buy into companies of substantive (tangible) worth and in a healthy financial state, and that are being overseen by a wise financial company steward (Chief Financial Officer) who is looking beyond tomorrow, articles like this Bloomberg piece are shocking and unsettling.

The proof is in the pudding, so the saying goes. As recent articles like the Bloomberg piece reveal, indeed the stock market is yielding recent evidence of an insatiable appetite for risk-taking. Our entire economy and the financial markets rest on our collective confidence  in the value of the U.S. dollar since there is nothing of actual tangible value, like the former gold standard, upholding its worth. So, confidence is critical to our future. However, irrational confidence that converts into reckless risk-taking (in my opinion, a key attribute of “gambling”), is purely dangerous for our national well-being.

Participants in the stock market simply cannot afford to buy into the notion that the balance sheet does not matter, not even to momentarily flirt with the notion. Purposely selecting companies and initiating stock positions where the balance sheets presently reveal near-bankrupt scenarios (as revealed by poor Altman Z-scores, for example), is not an effective investment strategy; in my view, it is a recipe for disaster.

The main reason I wrote “Choose Stocks Wisely” was to encourage the wide-spread use of the balance sheet in risk assessment with regard to investing in common stocks. Without the balance sheet, there is simply no other tool for determining the amount and quality of equity supporting the price paid for a share of common stock (a share of the company equity). The balance sheet “IS” the only statement that details the financial position of a company at a point in time.

Banks were making so much money during the housing boom of several years back that a practice called subprime lending became widespread. The security of the loans seemed unimportant while the party lasted but that party came to an abrupt end. Yes, we all were witnesses to what took place starting in 2007 and 2008. We need to learn and remember some lessons thoroughly.  Will we disregard the importance of sound financial management practices that keep companies in good financial condition (per the balance sheet) again, and so quickly?? Please “don’t drink the kool-aid!”