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Investment Decisions Based on Changing Models

Investment Decisions Based on Changing Models

My previous blog discussed changing business models and illustrated this in part by using market values. Some people called me wondering if this was a way to assess whether that should be used to make investment decisions. It is definitely not an investment criterion. The blog was intended to show the new way business is being conducted and the disruption to long established industries, not to tell you what is a good or bad investment.

I don’t have to reach back too far to remind readers about what happened in the late 1990s with the “dot com” bubble bursting. Just to reiterate, the NASDAQ index reached its peak on March 10, 2000, closing at 5408, and then fell to 1108 on October 10, 2002. Even today, it is still lower than its year 2000 high.

I’ve written some blogs on investment criteria but I feel it needs another look and a reminder. Major criteria for investing in a company should be the sustainability of the business with current profits or potential for future profits. Basically, the price of a stock is nothing more than the current value of its expected returns which can only be in the form of dividends or a rising stock price.

Some internal things that drive value are the profits earned and the company’s ability and willingness to distribute them to its shareholders in the form of dividends or share buy backs. Retained profits that are used to grow the company need to evidence this at some point with added profits that should also provide a return greater than the investors could have realized if those funds were distributed rather than used by the company.

In analyzing a company you might want to invest in, you would need to review its product lines, margins, growth potential, customer base, company brand and franchise, market share and whether it is growing. Analyze whether or not it can grow, sales and profits per employee, number of units sold, order size, new markets company can enter, new products, its competition, its potential for being disrupted, its debt structure and exposure to interest rates, what countries it does business in. Pay attention to how those currencies perform in relation to the U.S. dollar and their inflation rates, and the trends of each of these items and much more. You also need to understand how profits are generated. I don’t want to be cynical, but you would also need to know that the information provided to the public is honest because we have just seen how this can destroy the value of a company. Now, here is the killer… even if you had all of the right skills, you would not be able to obtain much of this information. This is the type of information I review when I do due diligence for a company a client wants to acquire. Buying stock is nothing more than buying a company. If you don’t believe this, ask Warren Buffett and his partner Charles Munger who have always maintained this.

There are other risk factors – too many to mention here, but you can access them in most company’s Form 10K filed annually with the SEC. Go to to search for your company.

There is a takeaway to today’s blog. If you want to own stock, do not buy individual companies; buy them in a mutual fund or index fund tailored to your investment goals. And, don’t try to make that killing or out-smart everyone else. However, you can still lose – just look at the roller coaster NASDAQ values mentioned above. Invest with care, caution, with goals and don’t be stupid.

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