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Thread: Second-guessing stock decisions - and really understanding fundamentals!

  1. #1
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    Dizzy Second-guessing stock decisions - and really understanding fundamentals!

    When I decided to take a break from dancing I made a goal to educate myself in the stock market, investing in general, and macroeconomic issues on a global scale - obviously it's a work in progress.

    The past couple of years I read a lot of investing books, and I read the Report on Business, Economist etc. daily and try to keep an eye out for trends so I can make informed decisions.

    I own several company stocks (among other types of investments) that I *believe* were based on sound decisions - I based the choice to buy on what I interpreted as fair price, solid, productive and promising company fundamentals. I suppose my timeframe is "long-term" as I don't need the money in the near future, however I'm more concerned with a company's performance than # of years.

    My concern is that I'm not really 'getting' it.
    Obviously I'm not going to be right all the time and I expect to lose $ in some cases - and I'm happy to consider it like "tuition" in business/investing school. But if I am not learning from the loss then it IS a waste.

    Here are my questions and I'd really appreciate any comments, thoughts or advice. Thanks in advance:

    Is it possible I'm placing too much emphasis on a sound balance sheet? I know not everything is transparent. One of my criteria involves looking at price to earnings ratio - but how much does it really indicate about a company? Market sentiment can't bankrupt a company, right?!

    Here's an example: A company who's shares I own (RIM / RIMM) just reported it's quarterly earnings and market sentiment seems to play a HUGE part in this one - anyway the share price just went way down. The earnings per share were a cent lower than company and analyst expectations - but I don't get why that's so undesirable. Apparently profits overall were still "in line with expectations". My understanding is that projected revenues were missed by 0.5% and it grew revenue 'only' 18%.

    The quarterly revenue was down though - maybe this is what matters to analysts or short-term investors/traders? I take a look around me and base my thoughts on what I see happening around me and I do try to determine the 'value' of the company and I understand that there are really confilcted opinions on this particular company.

    But is there a resource or book you recommend that will help me understand numbers and balance sheets, P/E, EPS better than I currently do? Thank you!

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    Default Re: Second-guessing stock decisions - and really understanding fundamentals!

    while this will probably lead to accusations of spewing 'gold foil hat' crowd conspiracy theories, there is a whole lot non-mainstream commentary out there that generally makes the following points ...

    - pricing levels of today's stock shares often have little to do with a particular company's balance sheet, long term business model, or for that matter long term investor sentiment

    - pricing levels of today's stock shares have a whole lot to do with

    ... 'hot money' short term trading - which can take place on both the long and short side

    ... purchase and sale of futures / options on particular stock shares which carry significant weight in a particular stock index ( like RIMM vs NAS) in order to 'force' the index up or down

    ... proprietary trading desks of major Wall St. firms selling particular stock shares to each other in order to temporarily move the share price at a certain point in time ( like now = end of first quarter ) in order to 'lock in' valuation levels of, say, a mutual fund they operate which contains that particular stock

    ... hype and 'sentiment' play a disproportionately large role with tech stocks of all kinds - because forward P/E projections are usually based on very 'thin' assumptions re one company's product's ongoing competitiveness vs another company, one company's product being 'blown away' by an unexpected new release from a competitor, assumptions re future consumer spending on clearly 'non-essential' tech purchases, etc.

    ... there are also major forces at work that purchase / sell particular stock shares ( and particularly so in the case of index stock shares ) for purposes other than long term investment or short term profit - see the Plunge Protection Team ( )


    Don't put yourself down for 'not getting it'. The real problem is that in the real world the analysis of a company's economic fundamentals, relative competitiveness, forward sales / costs / earnings projections etc. simply no longer play by the 'set of rules' that the textbooks ( and mainstream commentators ) say they should. Beyond that, no 'retail' investor will ever have timely access to crucial company specific information either.

    For all we know, half of the Wall St. prop desks may have had advance knowledge of RIMM's sales figures, then decided to trade a relatively small number of shares amongst themselves to run the price up over the past couple of weeks ... all the while selling call options and pocketing the premium. Then just before options expiry rolls around, they sell off the shares they had purchased in order to depress the share price to the point where all of the call options they sold wind up worthless ( = 100% profits on the options sales).
    ~
    Last edited by Melonie; 03-31-2010 at 08:49 PM.

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    Default Re: Second-guessing stock decisions - and really understanding fundamentals!

    For mature companies, looking at the financials makes sense - less unpredictables and defensible positions. Warren Buffett loves companies like these. Companies like GE, MO, KO, MRK are generally going to be very predictable, and for those, investing on fundamentals is better.

    RIMM is another beast - it's not being traded on fundamentals so much as sentiment because the smartphone market is still evolving. Remember how much Palm used to dominate that market? Now what's it trading at... $4 and on its way down?

    RIMM is being judged right now by how well it's defending against the iPhone. The fact it's being pushed down market is why it's taking a hit, although it kept its guidance intact.

    Remember that stock prices are generally a guess how of how well the company will do in the future - most current and upcoming news has already been "priced-in" for the well-known stocks.

    At the end of the day, you do your research and have an exit strategy if you're trading individual stocks. You asking these questions indicate you "get it" more than others, but remember that you're competing in a marketplace with much smarter, connected people who do this for a living, and they have absolutely no incentive to share information with you. Information asymmetry sucks, but it's the reality.

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    Banned Melonie's Avatar
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    Default Re: Second-guessing stock decisions - and really understanding fundamentals!

    For mature companies, looking at the financials makes sense - less unpredictables and defensible positions. Warren Buffett loves companies like these. Companies like GE, MO, KO, MRK are generally going to be very predictable, and for those, investing on fundamentals is better.
    I would make the argument that, at least in the case of the four stocks you mentioned, that US gov't policy has as much to do with stock valuation changes as company financials !!! GE has become a play on green energy / smart grid gov't subsidies. MO is a play on tobacco taxes. KO is a play on the US dollar's exchange rate vs foreign currencies. And MRK is a play on national health care. Thus, arguably, where these stocks are concerned the most useful information about future stock valuations can probably be found in the corridors of Capital Hill !!!

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    Default Re: Second-guessing stock decisions - and really understanding fundamentals!

    You are in high competition with traders who have MUCH MUCH better advantages than you do or ever can have, such as faster and more information, faster trading, more personal experience, experienced professional partners with different outlooks, inside information you will not have. corporate advantages, and a LOT more time to dedicate themselves to the task.

    Good luck with that.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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