I hope you are well today. Summer is drawing to a close and doesn’t time go by quickly!
Today, I’ll offer a few key summary tips for investing in common stocks:
-buy all the quality equity you can get for the money. This is where the balance sheet is essential and following this admonition provides substance to support your dollars invested.
-identify business catalysts before buying. Earnings drive stock prices. Thus, identifying favorable catalysts for future earnings is important. So, the better you understand the company’s business and its sector, the better you understand its prospects. If a company doesn’t reveal a probable optimistic future for its business, the deep value of the existing business (based on the balance sheet) may go unrewarded by the stock market. Further, if the outlook reveals great uncertainty and pessimism about foreseeable operations, the company may encounter substantive losses and see balance sheet (equity) deterioration since losses eat through balance sheet equity.
-buy primarily based on the balance sheet. Default risk is the greatest risk of all to invested capital and can destroy a portfolio. Many companies have lofty stock prices but reflect insolvency on the balance sheet via large negative book value per share amounts. They pay their bills on time but are always “this close” to failure should operations turn south. Ideally, you want to avoid risking losing any money. So, a healthy financial position supporting a stock price is desired. Buying “primarily” on the balance sheet implies there are secondary considerations. Since earnings drive stock prices, you do want to again find a business that not only has strong balance sheet support but also has a likelihood of improving its return (earnings) in the foreseeable future.
-sell primarily based on earnings. While I didn’t write on selling stocks (incredibly abstract relative to buying), income is the most likely event to move stock prices well above balance sheet equity levels. At what point does one exit due to the advancement of stock price from earnings? Most use P/E or PE/G or similar earnings-based measures to determine fair target prices.
In sum, the best buying prospects are those with a strong level of solid equity support and strong catalysts for taking the business forward. To find these stocks takes practice, time and discipline. Often, it’s better to pass if key elements are missing.
I hope my book, “Choose Stocks Wisely,” has added value to your library of investment discussion. I’ve never placed significant focus on promoting my book but want you to know how much I appreciate your support in its success. I know that your sharing about the book with friends has helped much. Thank you!!
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