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Vital Signs of Healthy Stocks (Part 1)

24 October 2007 - Features - Editor

How much easier it would be to deal in stocks if only financial health could be gauged as precisely as human wellness! Doctors have fixed ways of determining how their patients fare, but analysts only agree to disagree when it comes to most stocks! Subjectivity in assessing company performance may be amusing for those with no more than passing interests in stocks, but inabilities to spot changes in trends, and errors in valuing stocks, make profits for some at the costs of others.

Is it possible to separate the wheat from the chaff in evaluating stocks, so that scarce capital can be put to optimal use? How can trading in securities become more assured with respect to meeting our growth and profit expectations? These questions may appear to be utopian but they are ones to which experts in large financial institutions have reliable answers. Knowledge rather than fortune separates winners from others in the world of stocks.

There is no perfection in investing, but regular practice will certainly hone the skills relevant to picking the most appropriate stocks for individual financial ambitions. Screens for example, can be fine tuned so that all listings on Exchanges can be shortened to manageable lengths. However, screen systems offer so many options that the first lists may not produce any stocks that meet investment criteria.

How to Spot Stocks for Immediate Sale

Since preserving capital must have precedence over forecasted gains, and since there are always options for capital application, selling stocks of companies headed for troubled times, is more important than finding the best securities. How do professionals know when it is time to jettison stocks? Bankruptcy has 3 cardinal warning signs: high cash requirements funded largely by public offerings and with low debt, highly leveraged companies in mature business lines with heavy debt servicing obligations, and all corporate players who flirt with unlimited product liabilities. Gaps in statutory disclosure rules may allow promoters to hide some of these potentially crippling weaknesses, but all serious investors must persevere to get factual evidence to prove that they do not hold any stocks which are liable to go under soon.

Pitfalls in Old Ways of Picking Stocks

Once serious risks of substantial capital losses have been erased from portfolios, investors have time to upgrade their selections of stocks. This has traditionally been done by ratio analyses and by studying trends of paying dividends, though there are severe limitations to such approaches given modern business realities. The Relative Value Discipline (RVD) looks for companies with strong fundamentals which are out of favor with investors for some reason.

Vital Signs of Healthy Stocks (Part 2)

 


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