Pitfalls of Profitability for Stock Picks (Part 2)
Pitfalls of Profitability for Stock Picks (Part 1)
Stock investing can never be about numbers and ratios alone. Inflation, income tax provisions, and depreciation rates, are some of the factors that may favor some stocks at the expense of others. All investors are not concerned about justice, but stock investment decisions may go awry when based on transient advantages conferred by present legislation and macro-economics. Tax concessions for enterprises affected by Hurricane Katrina or the 2007 California fires, are typical examples of distortions that can creep in to short term stock price trends. There is no substitute to patient math with a calculator when studying a financial statement! It is also true that we cannot learn enough about stocks from quantitative declarations alone.
Moving Towards Value Based Stock Investing
Stock investing is a tantalizing balance between quantitative and qualitative appraisal. You do not want stocks without robust cash flows and stable returns on invested capital, but you have also to spot new opportunities before the rest of the stock market. Distractions abound in any stock exchange environment, with plenty of misleading opinions expressed amidst some nuggets of real leads. The stock index is never reliable on its own because so many stock picks can beat overall trends. What is worse is that opportunity costs may cost you dear if your cash is tied up in stocks with declining price trends.
The 10-K is an excellent facility for investments in US stocks. The document can be imposing in its bulk, but a careful study of all its contents should leave few significant gaps in your understanding of the future cash potential of any traded stock. It is a pity that there are no comparable disclosures about government securities, though they should form important parts of every portfolio! Perhaps we are limited to buying local government bonds that we happen to know well, or ones we support ideologically.
Stock investment decisions made by constructing future cash flow scenarios are likely to form learning platforms for diligent investors. The chances of making investment losses decrease, especially in terms of making the same errors repeatedly.