If you're buying stocks on a "story", but without reviewing their financial statements, you’re looking for trouble.
The “story” for the stock is always important. For example, Costco’s story is that all parties are benefiting. The customers are getting great value for their money. The employees are relatively happy and well paid. Stock holders are happy about the growth in the company and its earnings.
I love to frequent places where I feel like I am getting “a lot of bang for my buck”. Costco fits the bill. Did you ever go to a store where you ask for help from an employee and the employee ignores you while they finish something they are texting on their phone. Come on now! Don’t waste my time. Costco has a HUGE special dividend every couple of years which was $7/share last time. I anticipate another is coming up really soon. The greatest thing is when these special dividends are a mid-teens percentage of your cost basis. Yippee!
Lots of people buy stocks only on the story without looking at the numbers. In this case, speculators (not investors by definition) are just riding the wave of public sentiment. I always look at the whole financial picture (10K’s and 10Q’s) from 2000 on to get a clear picture on how well the business has been managed. This alone helps to significantly increase my “batting average”.
Some people say they don’t have the time to do analysis on their stock purchases. Just think how long it took to earn the funds that are being used for the stock purchase. That effort likely took a long period of time. Why just plunk the money down without any research after all that effort. The better deal would be to go buy a lottery ticket.
Two things could be happening here. First, you could be buying a great story with great “numbers”, but the relative price in the market compared to the financial performance of the company might be out of whack. This means you could be paying way too much. A tasty steak may be sumptuous, but do you want to pay $300 for it when it only worth $50? In my mind, hell no! Second, you could be buying a great “story”, but there are no numbers and number trends to support it. That’s even worse! It is nothing but a “house of cards”. Hopefully, you “get a chair before the music stops!”
If you aren’t looking at the hard numbers and their trends, the risk is high. I would say it is akin to going to play golf, but you are at the tee swinging with a blindfold on. How do you expect to even get near the pin?! Really?
There is no free lunch in life. Understand the “story” for buying stock while also understanding the numbers and your “batting average” will start to improve!
