When an investor chooses a stock to buy, endless reasons as to why that investment should be made can be argued. But simply put, if an investor likes a company due to its profitability ratios, ability to grow, wide economic-moat, product(s), and great management, you have to ask yourself the following:
- Will you let headlines on the economy, politics, and regulation pressure you to sell what may be a shrewd investment?
Nowadays, a company can announce an increase in its dividend or say that they expect to be even more profitable in the months ahead (all companies forecast growth, profit, expenses, etc…), yet the company can be losing you money! It seems as if investors care more about employment data and “fiscal policy” (look it up) than what the actual management team of the company you are invested in has to say!
Look at the banks – it is arguably hard to make money in the financial sector due to new regulations from Washington D.C. and an unclear picture of what this industry will look like going forward.
Then you have Netflix (ticker: NFLX). This company has been up and up and up. Its business model, management team, and growth prospects are really keeping the engine fueled! When people choose to invest in this company, they are not thinking of employment data, new regulations, or interest rates.
Just remember, a company you are invested in may be profitable or have a great product, yet broader themes can bully it around. Will you be patient and hold - maybe even buy more, look at more data when analyzing the company, or let some political headline scare you out of what could be a great company? That is up to you to decide.
Broader economic data can be found at: http://bls.gov/
"Nowadays, a company can announce an increase in its dividend or say that they expect to be even more profitable in the months ahead,yet the company can be losing you money."
ReplyDeleteThis is all too true. Just take a look at Enron. Once on top of the game, this company had it all. Their stock and fame rose without bound. Yet it was all a scheme. Faulty accounting practices helped make the main figures in the company rich and seem like the greatest thing to ever see the light of day. However, this company made countless errors and in the end filed for bankruptcy. The people behind this scheme (Ken Lay, Jeff Skilling, Andy Fastow, etc) made millions while the everyday people (including employees who had their pension funds in the company stock) lost it all. All in all, you must remember to be cautious and always use sound judgement. Don't always follow the public opinion; make your own wise decisions.
You are completely right, Denis. Deceitful business practice and unnecessary influence on public opinion can have devastating effects on the stock market. The problem I see, however, is that the issue of public opinion simply cannot be fixed. Sure, we can deal with corporate deception and shady accounting with more in-depth auditing. But that's not going to stop the general market from gobbling up the words of businesses and the media in general.
ReplyDeleteWe all know the stock market has a tendency to quiver at just about anything. The Dow Jones in the past few months has shown a recent pattern of rising and falling almost immediately after the President makes an announcement on something like the War on Terrorism. This seems to prove that the principles of market investors often diverges from the old adage "believe half of what you see and none of what you hear". Behind all the positive and negative numbers in the stock market are often words which fuel those number changes. It's always wise advice to tell someone not to blindly follow public opinion. But since it is public opinion (the overwhelming majority), it seems intuitive that words of the public will have more affect on the market than the words of a few investors who follow their investment strategies with their own wisdom.
In short, the opinions of the public and the general market will always supersede the wise individual in terms of affecting the stock market. All we really can do is look out for our own assets, and know when the public is going down the wrong path. Often times, the consequences will affect the wise investor anyway, and that is a reality we will just have to deal with while investing.
I have to completely agree with both of you. When it comes to buying stocks, the decisions rest on your shoulders. Like Denis said, you do not have to follow public opinion. Just because the news or a website predicts a stock is going to decrease or increase, it doesn't necessarily mean it is going to happen. And even if a stock does decrease, it doesn't mean it is going to stay down, and at the first sign of trouble, i believe, doesn't mean you have to pull all your money out. On the other hand though, doing some research on your favored stock wouldn't hurt.
ReplyDeleteI am in complete agreement with all three of you. Whenever you buy a stock, there is a risk you take. You could think that this stock will increase, but it could decrease. It is hard to tell what will happen. Researching on the stock you are planning to buy would be very helpful. It would give you more insight and if this stock could potentially be a good investment. The public isn't always going to be right. Research would be more beneficial than listening to the public because you would have knowledge to help you chose the right stock.
ReplyDeleteVery interest commentary! However, when analyzing a company, it will be very hard for most investors to catch a corporate scandal in the works.
ReplyDeleteFew people have brought concerns on all sorts of situations to the appropriate authorities (SEC, FINRA) and many times the regulatory agencies ignored the concerns until thought came reality.
Nonetheless, skepticism is a great attribute to have when analyzing a company!
Media is the general informant of the people. When a media is published on a particular stock, depending on what they say, can lead to pulling out early or investing in something that could be catastrophic. I feel that we should be aware of the media but going off what was said before me is researching before making a final investment. Not all of the media is accurate and people need to be aware of this and be cautious in what they are investing in.
ReplyDeleteKnowing how tricky and inconsistent the market can be, it is important to approach the purchase of a stock correctly. It is pretty clear that a person can not know the stock market fully. Though they can use past information, and predict what it may be to get a better idea of the stock. I feel that you need to take each purchase into account and realize the potential it has. If you go out and buy all this stock without realizing the potential increase or decrease of its value, you are gambling everything. It is essential to examine factors that can take place with the company in the short and long term future. Without doing so you create no sort of strategy. All in all, it is important to understand what your stock has to deal with, and if it has the ability to appreciate.
ReplyDeleteI feel that making such a distinction is warranted: Although there has been situations where financial data has been falsified (for example, Enron), this is an extremely uncommon situation.
ReplyDeleteThe overall point to my original article is that a good company with rising profits and growth can still be hurt by headlines and media reports that in reality have nothing to do with the company.
For example, there can be a small regional bank that is doing great. Now the stock price of this regional bank may trade (be correlated) with larger financial institutions who are more susceptible to new regulations. Even though new regulations will not have an impact on this regional bank like they will on larger financial institutions, the stock price of this regional bank will still (not always) trade (be correlated) with the larger financial institutions.
Mr. Walker, I agree with the overall point about how good companies can be hurt by irrelevant media reports, but I do not quite understand the example given. I do not understand how new regulations would affect the larger institutions but not the smaller banks. What regulations can the government or Federal Reserve make that affect only certain banks?
ReplyDeleteBenjamin, there are two types of banks:
ReplyDelete1) Commercial banks
2) Investment banks
Commercial banks focus solely on accepting deposits and making loans. Investment banks engage in a variety of activities. To name a few, consider the following: taking companies public (IPOs), M&A advisory services (mergers & acquisitions), and proprietary trading (literally taking excess capital from the firm and trading it in commodities, stocks, fixed income, you name it...)
Now some commercial banks (Bank of America and JP Morgan Chase to name a few) also engage in investment banking activities. Following the Great Depression which occurred in 1929, there was an Act called "Glass-Steagall" that was passed in 1934, which simply made it so commercial banks cannot engage in investment banking activities. However, in 1999, this Act was repealed...
Addressing your concern, many popular banks have made a large amount of their profits from proprietary trading. Arguably, these banks have taken on unwarranted risk. This is where new regulation comes in... Now smaller regional and local banks do not engage in these kinds of activities. However, because stocks all compiled in a given industry tend to be correlated to their peers, you can see how and why some great companies' share prices have been punished.
This is only the tip of the iceberg. Later in the competition, a professor will address this...
In the end, no company would directly announce that it is not going to make profits and grow in the coming year. For investors, it is important they think through each investment that they are making and consider all aspects of a companies success. If all aspects such as management, possible growth, history, and stability are taken into account, then it is important to stick with your decision.
ReplyDeleteOne of the most fundamental investment strategies that has been proven to work is staying in the market for the long haul. Pulling out and trying to ride the market is difficult (not to say if done right, profits won't be made), but those who stay in have been shown to make profits off their investments. If you are skeptic of the companies you plan to invest in and fully look into them, then you should be just as skeptic to pull out.
It is important to understand that you get what you want from the media. They are in no way unbiased, and their opinion is not always correct, it is simply another (educated) opinion. Unless there is substantial evidence to pull out from multiple sources, don't only listen to what the media is saying.
I think that in order for investments to be successful and make profit, you need to be willing to lose some amount of money, and understand that the companies and media are not fully reliable. Staying and holding with investments that were thought through and made intelligently will ultimately lead to success.