The Three Golden Rules of Investing
Perhaps you have recently been walking in the forest. Or maybe you went on a picnic. Or even went swimming in a river; all wonderful, refreshing activities. In each case, however, you have to know what you are doing. Otherwise you could walk into a patch of poison ivy, get swept by the current, or even get seriously injured.
Danger - Thin Ice
So often with mega disasters such as One-Tel and Enron, there have been a number of warnings signs. Here I don't mean abstruse accounting jiggery pokery that only professional accountants could pick up.
Rather I am talking about little snippets that appear here and there that make you think that there is something wrong. Or, at least, indicators of management behaviour showing that this is not the type of company you want to be associated with.
Why Stock "Value"Systems Have No Value
The vast majority of "value" approaches are based upon a standard discount cash flow (DCF) model. They all purport to find what is called the intrinsic value or true value of a stock. This is the value the proponents claim that all rational investors should pay for the stock.
Many of the authors and investment websites claim to base their intrinsic value approach upon the methods of Warren Buffett. In fact, it is actually very unlikely that he really uses any of these methods in anything vaguely resembling a formal approach.
Earnings Forecasts Made Easy
In the long run, the value of a stock is a function of its earnings. Anticipated future earnings and current earnings.
Even past earnings influence the price. Consider two companies with the same current earnings and the same earnings forecasts. The company with the higher earnings growth rate for its past earnings will likely command a higher price because of its better track record.