Investing 102

[BC69]

Here's my "take away" from this stuff.... Depending on which headline you read (which one your newspapers business section decided to run) may affect your thinking and your view of the world. One would be "holy cow -- they're UP 32%" -- the other would be "wow... they MISSED... that's got to be bad".

The takeaway is the fact that markets prices already price future expectations. The first article could have read, Net Income up 1000000%, but if the market expected 10000002% then it doesn't matter. They already priced in the assumption. So being up doesn't matter unless its up above expectations.

Google last week got beat down because they might have had a good quarter, but didn't meet expectations. The problem there is GOOG is too cool for school and doesn't provide guidance to the street, so the "expectations" set in the market are generally not very well baked and you end up with big swings like last week when actual numbers are reported.

[GregWeld]

Originally Posted by BC69

The takeaway is the fact that markets prices already price future expectations. The first article could have read, Net Income up 1000000%, but if the market expected 10000002% then it doesn't matter. They already priced in the assumption. So being up doesn't matter unless its up above expectations.

Google last week got beat down because they might have had a good quarter, but didn't meet expectations. The problem there is GOOG is too cool for school and doesn't provide guidance to the street, so the "expectations" set in the market are generally not very well baked and you end up with big swings like last week when actual numbers are reported.

I think you missed my point... and it's an investing 102 point...

There were two DISTINCT headlines... one quiet positive - one more negative.

My points are not about the actual facts as stated -- but more a general - "here's some things to think about" and if you see ONE article - it might pay you to investigate further rather than just relying on a headline.


Your points are valid - just not really related to what I was trying to get across. "Expectations" are very real and set the bar and for a trader - they can win or lose based on these expected or "whisper" numbers. We could argue all day about that. Personally I think they're ridiculous because they're nothing but "best guesses" = there is a high number by one analyst and there is a lower number by another, and everything in between. Personally -- I'd prefer to hear/read etc what the company says about it's business going forward vs. someones best guess.

Remember too that when I'm writing... I'm trying to speak to a very broad base of understanding. Many here are brand new to investing in anything. I'm writing to help them understand and perhaps learn from events etc that are new to them.

[GregWeld]

Originally Posted by BC69

The takeaway is the fact that markets prices already price future expectations. The first article could have read, Net Income up 1000000%, but if the market expected 10000002% then it doesn't matter. They already priced in the assumption. So being up doesn't matter unless its up above expectations.

Google last week got beat down because they might have had a good quarter, but didn't meet expectations. The problem there is GOOG is too cool for school and doesn't provide guidance to the street, so the "expectations" set in the market are generally not very well baked and you end up with big swings like last week when actual numbers are reported.

BTW -- Google is another one of those "priced for perfection" stocks I've discussed. I don't care if it's Google -- or pick any other name... My point and writing would be about investing in these "kinds" of stocks where all the planets better be aligned PERFECTLY - because if not - they get killed. That may or may not be a buying opportunity. That depends on a persons view and risk tolerance etc. My Investing 102 point would always be about UNDERSTANDING these kinds of stocks before you invest in them and what and how the market will operate. And understanding the terms such as "priced for perfection" which is used quite often.

[WSSix]

From a long term point of view, wouldn't it better that a company grew by 32% even if they did indeed miss expectations by 1 penny? I realize the price of the stock is based on expected earnings but 32% growth year to year is good. I personally would rather know they had great growth. Am I wrong in thinking that's more important to me since I'm long term?

[bdahlg68]

Originally Posted by WSSix

From a long term point of view, wouldn't it better that a company grew by 32% even if they did indeed miss expectations by 1 penny? I realize the price of the stock is based on expected earnings but 32% growth year to year is good. I personally would rather know they had great growth. Am I wrong in thinking that's more important to me since I'm long term?

It can be real good and it can be real bad... the important thing to determine is why this 32% increase in top-line growth yielded no benefits to bottom line. If this is readily explainable and somewhat of a one-time deal, then it should be back to business as usual. If this is not, then further evaluation is needed....

[GregWeld]

Originally Posted by WSSix

From a long term point of view, wouldn't it better that a company grew by 32% even if they did indeed miss expectations by 1 penny? I realize the price of the stock is based on expected earnings but 32% growth year to year is good. I personally would rather know they had great growth. Am I wrong in thinking that's more important to me since I'm long term?

Growth always (usually ) trumps all else... unless they just have really inept management.

Growth has to be measured by different metrics.... Sales (top line) - Profit (bottom line) etc.

It is always a "it depends" metric. Thus you always have to look deeper at a P&L to find out - or at least try to understand - how a business is doing. Some companies that are "new" -- let's use Faceybook as an example -- might just be judged on top line growth - because their expenses are going to be steep as a "start up"... but eventually they will be expected to produce a profit! A more mature company should be able to control their expenses and therefore, gains in top line should also be seen in the bottom line.

This is one reason that just basing a decision to buy or not buy on one metric is kind of foolish. P/E's (Price to Earnings ratio) are one of those metrics that are often sighted as being "too high" or perhaps "low" making the stock seem like a "value". I just don't think any single metric should be a basis for any decision. It's more like a good engine... it needs to be the sum total of all the parts and they need to be working together.

[WSSix]

That makes sense. You need substance and not just fluff since we aren't gambling here. The history of the stock value and the company can be used to determine if indeed the company is having both top and bottom line growth, correct? Because as Brian mentioned, if it only had top line and no bottom line, something's amiss and I'd imagine the stock wouldn't do well throughout history. At least I would think that's correct.

I guess I'm just trying to tie the simple approach of looking at a stock's history to be a good indicator of its potential as a viable investment to a deeper understanding of what or why its price history is what it is.

[GregWeld]

Originally Posted by WSSix

That makes sense. You need substance and not just fluff since we aren't gambling here. The history of the stock value and the company can be used to determine if indeed the company is having both top and bottom line growth, correct? Because as Brian mentioned, if it only had top line and no bottom line, something's amiss and I'd imagine the stock wouldn't do well throughout history. At least I would think that's correct.

I guess I'm just trying to tie the simple approach of looking at a stock's history to be a good indicator of its potential as a viable investment to a deeper understanding of what or why its price history is what it is.

Yes --- growth in both top and bottom line is pretty darned important... and the stock price "normally" will reward those companies that can show growth in both those areas. Newer companies don't "normally" -- note I have to say normally lest someone find one company to use as an example to show I'm wrong - don't pay dividends etc because they don't have that long history of steady earnings. Higher P/E ratios are sometimes given to companies that can show they have outsized growth... because folks are willing to pay more for them and hope that they grow into the higher P/E.

[GregWeld]

Another "Investing 102" term..... UNCERTAINTY.

If you've ever listened to a business news channel - you've heard this term. "The markets hate uncertainty". To me - uncertainty equals undecided or unsure. What's that do to the market? A market takes BUYERS and sellers... if you're uncertain - you may NOT decide to buy.... and when that happens you get a down market.

I had warned in an earlier post that I thought as we approached the election that we might see a choppy market... people are unsure what their tax situation is going forward. They're unsure what the economy is going to do. There is no clear picture of what's ahead.

What you are seeing is exactly what I had expected. It's not rocket science... "WE" are normal human beings... and if we are uncertain - then so is everyone else. It's the same thing I've been preaching about when you're buying - use your own gut sense about a business... long lines at the check out? Great! An empty store - empty parking lot.... not so great. You're friends finding work and buying houses? Or are they selling everything they own and collecting unemployment... Obviously this "depends" - it depends on where you live - what industry you're in - your own economic surroundings etc. But in broad general terms - you get a sense for what's going on around you. You either feel optimistic or negative - OR - UNSURE. Uncertainty/unsure is the deer in the headlight... which means no commitment.

Now -- add to this -- we're in "EARNINGS SEASON" which means companies are just starting to report on their earnings -- and so far these seem to be coming DOWN... The market may have been a little optimistic about the "turn around". I think the USA is turning around - but we have those across the pond doing worse - which is more important? I think we're seeing that in companies reports such as UPS and FED EX etc reporting slowing "international" business. I would certainly expect that given the news for the last many months.

I've said in earlier posts that this year has been AMAZING -- it's been an investors dream! Everything has seemingly gone straight up. That's an easy market to feel good about. It's easy to buy. It's easy to hold. I personally have some outsized paper gains. Long term investors - people that have been in the market for the last 3+ years have seen their investments go up 100% in many cases... so now - what to do? Sell? Hold? Unsure? When it's unsure - they're not buying! Right? Maybe they just sell a little bit to lock in some capital gains at this years 15% rate... No biggie there -- unless you're in an uncertain position and then the buyers just aren't there to LIFT the price.

On big down days -- the one thing I have to remind myself of.... even if a stock is down $5 - that means SOMEONE paid that price for it... so there are buyers out there... they're just bargain hunting. They may only be nibbling. They may be averaging down.. but someone is buying or you wouldn't have ANY market at all!

NOW ---- If you're in dividend stocks for the long haul.... then you're dividend is buying at these lower prices - which means you buy more shares per dividend period which means you're compounding your returns FASTER... and buddy... That's a GOOD THING!! Remember that as the price comes down... the percentage of dividend rises... you get more shares that pay you a higher PERCENTAGE return and next quarter you pick up even more shares and so on.

In actual fact YOU WISH you'd have invested in 2007 - and the market went down another 30% and you'd bought a ton of shares CHEAP! 'Cause right now you'd be jumping for joy and wishing you'd have put even more money "to work"!