Hello friends. Today’s post shares what I believe is the most important part of the Choose  Stocks Wisely methodology. That part is the “quality” balance sheet scorecard checkup. To discuss this is timely, I believe, as more and more people wonder where the stock market heads from here.

Risk “feels” like less of a concern in a long running bull market and we’ve sure been witnessing one. Yet, risk should intuitively be viewed as a greater concern in such times as complacency can become a subtle danger.

Managing risk is always essential when investing in stocks. In my view, managing risk in times like these is very important because, again, it “feels” less important. Feelings aren’t a basis for decision-making when it comes to stocks. At such times, one’s guard can be let down and that’s when significant losses can occur.

I’ve written several posts over the years now since my book was published about revised screens that could be run in order to locate more potential quality, low-price stock candidates to test via my scorecard. Of course, screening is not the method but just a way to fish for companies that might pass the method’s muster. The method is the scorecard.

Recall that the scorecard seeks to accomplish two separate things; first to identify “quality” and  next “low price.” Prices as low as my “low price” scorecard approach seeks become harder to find when stock values are running high — when confidence is strong and concern over uncertainty (risk) is relatively low. Again, I believe we are in such a time now. Then, to buy stocks in this strong market, I sure don’t want to compromise on “quality” even if I do accept paying more than a dirt cheap entry price (sought by my scorecard price standard).

The overarching premise of my book is risk assessment. Further, it posits that the balance sheet exists to enable risk assessment. That is, proper risk assessment cannot be performed without balance sheet analysis. Companies with strong, healthy financial positions (balance sheets) can weather unexpected events much more so than those with balance sheets that reveal companies with over-levered and illiquid (and intangible) assets committed to squeezing out every possible additional penny of earnings per share (EPS). The latter can rise the fastest and the most until they don’t. When risk becomes the central focus, the high-flyers can fall the fastest and the most; and a risky balance sheet offers little support in those times.

So, as to the issue of risk assessment and my CSW method, the quality checks performed by the scorecard are of great import in my view. Any company I invest in must have a healthy balance sheet and that requirement is accentuated in the present stock market that has been climbing since 2010.

See you next time.