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Mosaic Theory for Stock Picks (Part 2)

14 December 2007 - Features - Editor

Mosaic Theory for Stock Picks (Part 1)

Adaptive Practice Makes Your Stock Picks Better!

There is much to commend domain expertise when it comes to making stock picks. Each sector, industry, and country has its own drivers and characteristics of stock value. It is best to understand the business model of an enterprise before investing in its stocks. What are the key factors for success? Which are the main threats? Secondary sources of such insights are rare, and not trustworthy when available. It takes years of experience to generate primary information, but focusing on a defined and narrow area can expedite matters. That is why large and professionally managed financial institutions typically employ banks of industry experts.

Trends in gross margins, changes in important provisions, new competition, fixed cost increases, exaggerated current asset reporting, and legislative changes, are the six most important spokes on which the Mosaic Theory revolves, to predict a future stock quote. A company has choices of managing costs or of asking customers to pay more for products and services, but a declining trend in the gross margin on either account, is asking for trouble. Such stocks deserve to be sold short and should have no place in any portfolio unless executives execute immediate and effective correction plans.

Rumblings of litigation and product liability start well before they rise in public awareness. They are worth close tracking because they can sap a company of all its reserves. New competition is easy to spot, but executives are generally over-confident, and tend to be dismissive about such matters. Investors should make sanguine evaluations about such developments. Personnel cost increases are the ones which are most difficult to reverse, so investors should avoid stocks in which this happens regardless of short term margin trends. The sub-prime crisis of 2007 must have made stock traders everywhere wary about reported debts, but the same principle of hidden losses may lurk in inventory accounting. Deliberations in Congress and Presidential vetoes can swing stocks either way, so investing calls for considerable political guile!

Regular practice and adaptive learning helps in solving puzzles. This applies to the Mosaic Theory as well. Join our forum to analyze stocks using discrete trends, news, and pieces of information. Learn from the combined experience of our community, and share your expertise with us as well. Start posting now!

 


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