Commentary
There is comfort in knowing a lot about a company. It makes us think that
we are smart, or that we have done more work and therefore deserve more
success. The more we are told about the company, the smarter we think we
are and therefore, the more money we will make.
Unfortunately, for most of us, it also means that we are more susceptible
to blind faith.
How many investors have ever called a company requesting information and
had the company tell them that things were bad and the stock was headed
lower? I expect the answer is zero. So why do we call? Simply, to make
ourselves feel better. We ask what the company is doing, where are their
properties, what is the geology like, how will the new technology change
the world blah blah blah. And the answers almost always have a positive
spin to them, getting us excited to buy stock, buy the dream.
Perhaps this is why so many people lose in speculative stocks. They forget
that the dream is speculation.
To be successful in any stock, understand that there is only one thing that
determines where a stock price will go. That is, the ability of the company
to make money. And so, there is only one thing that will cause a stock to
go up or down. That is, new developments that change the ability of the
company to make money some time in the future. If a company finds gold,
they have improved their chance to make money. If the price of gold goes
up, they have improved their chances of making money. And so, there are two
types of information that can change the price of a stock, that relating to
what the company can control, and that which relates to the market and is
out of the company's hands. The collapse of Bre-X and the decline in gold
prices was out of all junior gold explorer's hands, and yet they were all
affected.
So, when you research what a company, you need only consider one thing;
what is going to make this company worth more in the future? Forget about
what the company has already done, or how strong their assets are now.
Those things are already priced into the stock because those things are
public. You have to figure out what is not public. And of course, that is
not an easy thing since companies can't tell you the secrets. If they tell
you, they have to tell everyone and if they do that, there is no
opportunity because the information is already priced into the stock.
All is not futile, for we are going to give you the approach.
When looking at any company, ask yourself what the potential is for good
news to come out in the future. Suppose you are looking at Company A, who
have 5 properties in S. Voisey Bay which have great potential. However,
they can't do any exploration work until the ground thaws, which is three
months away. Great potential, bad timing. There is little news that the
company will generate. Now go to Company B, who have just finished a 6
month exploration program. The results of all the work will be released
next week. If the results are good, the stock will climb dramatically. If
they are bad, the stock will fall. As an investor, if you make the right
guess, you will be rewarded. The question is, what is the guess to make.
You focus in on Company B because that is the company that has the best
potential to reward your investment dollars the soonest. But what will the
results be? Until they are public, how can you know? Once they are public,
the opportunity will be gone because everyone will know and the price will
reflect the news.
Alas, you can count on greed to give you the clue. There are people out
there who know more than the rest of us, those who are on the inside track
to information. And their greed ensure they will act. If the upcoming news
is good, they will buy. If the upcoming news is bad, they will sell. No
matter what they do, they will leave their trail in the market. How do
regulators find insider trading activity? By looking for abnormal market
activity and who is causing it before the news is out.
So, find the companies that have news around the corner and then watch the
market to tell you what the news will be. The market never lies.
Enough Said.
Reprint from Perspectives Newsletter |
