Lesson No. 1: The numbers don't lie. They can be stir-fried, oven-fried or convection-baked, but in the end they always hold the keys to the kingdom. That is why some short sellers and forensic analysts don't like to talk to companies. They want to avoid the spin or the face-to-face meeting that can create a psychological connection that may skew what otherwise would be black-and-white analysis. Don't ever underestimate the power and influence of the human factor.
Lesson No. 2: Quality, not quantity. Ignore the "beat the Street" headlines on earnings. It is what goes into the earnings that counts. As I quoted investment legend Thornton Oglove as saying here the past week, the real story is often on the balance sheet. And let's not forget the cash-flow statement. And this tip: The more complex and convoluted the financial statements get, especially for businesses that aren't overly complicated, the more reason to worry.
Lesson No. 3: GAAP isn't the same as a Good Housekeeping seal. Generally Accepted Accounting Principles, according to which all financial statements are supposed to be prepared, include plenty of gray areas that give management enough rope to hang itself. GAAP, after all, is subject to interpretation, and some managers are more conservative than others. Remember, just because the accounting is legal doesn't mean the end results won't be lousy.
Lesson No. 4: Don't confuse stocks and companies. They sometimes go in opposite directions. Stocks sometimes really do lie. Sometimes they are pushed artificially higher by a rotation by investors from one industry group to another, because that one sector happens to be in favor. Sometimes they lie because of short squeezes, which occur when short sellers -- who bet stock prices will fall -- are for some reason forced to rapidly purchase the shares they sold short. And sometimes they lie because of momentum. Momentum can take stocks to infinity and beyond, but true believers can wind up learning that momentum has a dark side: It is called reverse momentum, and it tends to kick in when you least expect.
Lesson No. 5: Risk isn't a four-letter word. A good rule of thumb is that before you buy, instead of asking how much you can make, first ask how much you can lose. That is what the smart guys do.
http://www.marketwatch.com/news/sto...9CD-4355-A7FA-7132EB2F4DB2}&dist=MostReadHome
Lesson No. 2: Quality, not quantity. Ignore the "beat the Street" headlines on earnings. It is what goes into the earnings that counts. As I quoted investment legend Thornton Oglove as saying here the past week, the real story is often on the balance sheet. And let's not forget the cash-flow statement. And this tip: The more complex and convoluted the financial statements get, especially for businesses that aren't overly complicated, the more reason to worry.
Lesson No. 3: GAAP isn't the same as a Good Housekeeping seal. Generally Accepted Accounting Principles, according to which all financial statements are supposed to be prepared, include plenty of gray areas that give management enough rope to hang itself. GAAP, after all, is subject to interpretation, and some managers are more conservative than others. Remember, just because the accounting is legal doesn't mean the end results won't be lousy.
Lesson No. 4: Don't confuse stocks and companies. They sometimes go in opposite directions. Stocks sometimes really do lie. Sometimes they are pushed artificially higher by a rotation by investors from one industry group to another, because that one sector happens to be in favor. Sometimes they lie because of short squeezes, which occur when short sellers -- who bet stock prices will fall -- are for some reason forced to rapidly purchase the shares they sold short. And sometimes they lie because of momentum. Momentum can take stocks to infinity and beyond, but true believers can wind up learning that momentum has a dark side: It is called reverse momentum, and it tends to kick in when you least expect.
Lesson No. 5: Risk isn't a four-letter word. A good rule of thumb is that before you buy, instead of asking how much you can make, first ask how much you can lose. That is what the smart guys do.
http://www.marketwatch.com/news/sto...9CD-4355-A7FA-7132EB2F4DB2}&dist=MostReadHome
