Investing 102

[GregWeld]

OUCH.....

[GregWeld]

I love "headlines".....


Since I have been out running "the rig" around (thru 7 states) I have ignored the market and my accounts. Thus the beauty of dividends...

This morning I'm just poking around and I see Kinder Morgan Partners (KMP) is up nicely. So I click on the symbol to see what's up. I always scroll down the page to see the news... and the two top headlines are this:


"Kinder Morgan says 3Q net income rises 32 percent"


I wish my 3 quarter NET income went UP 32%.... WOW! That's pretty nice!


The next headline reads:


"Kinder Morgan Energy Partners Lp (KMP) misses Q3 EPS by 1c"


Really? Reading the story tells you that they "missed" the "estimate" by 1c (one penny per share).....


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".

You have to poke around and when you see "news" - you need to get active and see if there's more to the story.

I'm not saying (because I haven't really dug into the two stories) which one of these is "more important"... I'm just saying that the headlines are so 180* different that if you only saw one of them it would make a difference in how you'd view "the quarter".

[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.