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Varchild2008 (85.27)

Balancing Risk with Reward: 1 TIP for NEWBIEs

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February 16, 2010 – Comments (5)

Since I made plenty of my share of mistakes in 2008....I think there is a theme to why I made those mistakes and why I no longer make them today.

TIP 1:  IDENTIFY the REWARD.

If you tell me you are investing in  X stock... or Y stock...  I will say why?
And if you tell me.."Well....it's undervalued... share price is low.... low P/E....."

I will say.... wait wait... What is the reward for you buying shares of this stock?

And you might reply, "Well...share price will eventually trade higher!  much higher!  This one's got plenty of growth!!  Look how cheap the stock price is!"

And I'll tell you that you are completely off base....  That attitude was Varchild2008 and it was wrong!!

Varchild2010  believes the Reward is not "Share Price will go up."

The Reward is actually..."Balance sheet Debt will go away due to recent acquisition that the company made along with progress in their most recent earnings reports in increasing income/profit/revenue."

BINGO!!                   The reward is  a return to a ZERO DEBT  Balance Sheet because of the acquisiton the company made.... and because of improved management performance.

I don't care about the stupid share prices anyhow....  I care about about the health of the company going forward and the recent track history report.... 

The whole business of "SHARE PRICE WILL GO UP"  will just make you sell off your shares when it doesn't happen....and you may be selling a winner out of sheer frustration and impatience.

Sometimes share prices go sideways inspite of the fact the company's underlying business is going WAAAY up.

Great example in my own portfolio is a stock that bottomed in Q4 and basically traded sideways...highly undervalued... then finally an earnings report comes out and share price jumps up BIG.... Stock is trading up 10-13% year to date.

Look at (F) Ford...  <------

Is Investing in FORD like I am invested in FORD.....  Simply because you think the share price will go up?????  Is that really the REWARD here?

Not for me.... I invest in FORD because of the Ford Fiesta, Ford Taurus, excellent management team and progress towards a ZERO DEBT Balance Sheet that was made in 2009.

Simply put... whatever the share price is TODAY is completely irrelevant to where it might be tomorrow...  Stop focusing on what tomorrow will look like in terms of share price and focus instead on how their latest products are shaping up.

Best way to invest is "CHANNEL CHECKING" your investments by visiting the location of your company's products or business or dealerships or whatever...see if customers are just as excited about your company as you are investing in it.

5 Comments – Post Your Own

#1) On February 16, 2010 at 8:37 PM, chk999 (99.97) wrote:

Channel checking is very important. Had I done it on one real money investment I would not have been blindsided and lost thousands of dollars.

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#2) On February 16, 2010 at 9:11 PM, Varchild2008 (85.27) wrote:

Yea well I lost plenty of thousands buying into stocks that were impossible to channel check because their business was either out of state or out of country where I live....:-\

Now granted....  When it comes to foreign stocks you can't channel check.... then that's a whole new TIP for newbies. 
In that sense you have to make sure you absolutely, undoubtedly, understand the underlying business....

Of course... if say the China company's operates a portion of business that you understand is excellent then that works..

Take the Japense Beverage Company that last year bought the European portion of Orangina/Schweppes.

I would say that beverage company is definitely worth investing in if they are a public company, from my own experience with Schweppes beverages...  I can channel check how Schweppes is doing / selling  in America an extrapolate how they may be doing in Europe.

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#3) On February 16, 2010 at 9:30 PM, portefeuille (99.61) wrote:

Take the Japense Beverage Company that last year bought the European portion of Orangina/Schweppes.

Suntory Buys Orangina From Blackstone, Lion Capital

Suntory is a "private company".

 

from Lost in Translation

 

and in German (had to include that one for the additional 4 seconds!).

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#4) On February 16, 2010 at 9:36 PM, portefeuille (99.61) wrote:

 

 

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#5) On February 17, 2010 at 4:25 PM, Varchild2008 (85.27) wrote:

I know Suntory is a private company... I know...

But I just wanted to mention that news item as an example where a company public or private can buy into a business you know and understand... making the buyer if public....worth investing in cause you understand what they bought and can to some degree channel check it.

(that was a mouthful)

Anyhow.. I think my point was made succinctly enough.

Reality is that I am trying to get out of the habit of mentioning my own stocks on my own blog as examples.

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