Welcome to earnings season!
As troves of fresh data roll in, Wall Street’s strategists and Armchair Analysts alike will be picking it all apart. They’ll be aiming to identify the market’s undervalued gems (to buy). And also its overvalued landmines (to avoid, or sell short).
The problem is… most of those go-it-alone investors – aka Armchair Analysts – don’t have the proper training, or tools, they need to determine what a company – and its shares of stock – are actually worth. Many, as I was horrified to hear from our resident Forensic Accountant, John Del Vecchio, don’t even read the full earnings press release!
But this inherent disadvantage sure doesn’t stop these guys from trying, even if their well-intended efforts usually lead them, like sheep, down the road to slaughter.
Of course, as one of us, you have access to all of our experience and wisdom, including John’s. His expertise is in picking apart a company’s books… finding unnoticed gems, as well as widely-denied landmines… and, ultimately, pointing investors toward undervalued companies and away from overvalued ones (not that that’s the only thing he looks for… he also uses his forensic skills to find undervalued companies).
He’s presenting an online exclusive next Thursday, January 28, called Earnings Exposed, to share details of how he does it, and which companies you should watch out for right now. Consider it a “what to do this earnings season” look at investing. Viewing is by RSVP only, so sign up now.
In the meantime, I want to tell you what NOT to do this earnings season.
The biggest thing to NOT do this earnings season is mistake discount for value, like so many investors do.
We’ve all been conditioned to channel our inner Warren Buffett and, repeat after me: “Buy low and sell high.”
No one can argue the logic of this mantra. It’s been popularized by (arguably) the world’s greatest investor. And, of course, when it works… it really works!
But buying low and selling high isn’t as easy in practice. Mainly because that stock you buy at a low price, today… very often trades for an even lower price, tomorrow.
(I’ll share some eye-popping data on this tomorrow, in the Market Insights section of your daily Economy & Markets email, so be sure to watch out for it.)
To truly appreciate Warren Buffett’s value philosophy, you have to consider another of his famous quotes:
“Price is what you pay. Value is what you get.”
And it’s here that most investors are led astray… into illusionary “value traps.”
Frankly, I’ve seen this scenario play out time and again. The details are always different, but the story is always the same. It goes something like this…
Bill, an intelligent doctor and family man, has some spare cash that he wisely wants to put to work. He’s looking to buy some stocks because he’s been told “stocks go up in the long run.” But he doesn’t want to overpay. He’s frugal by nature… always waiting patiently for a good deal. Or, as he knows Warren Buffett does, waiting to “buy low and sell high.”
So Bill spends the weekend doing some stock research. He makes a list of the companies he’s familiar with… ones he’d feel comfortable investing in. And then he pulls up some stock prices charts, which are now free on the Internet.
And this is where it gets interesting…
As Bill is scanning stock charts, he notices a lot of companies he likes are trading at prices much lower than they were just a few months ago. They’re trading “at a discount,” he thinks to himself.
Shares of Bed Bath & Beyond (BBBY) are “discounted 13%.”
American Airlines (AAL) is trading at a “near-17% discount!”
Shares of E-Trade Financial (ETFC) are “going for 60-cents on the dollar.”
Mind you, I forgot to mention that our illustrative investor, Bill, was doing this armchair stock analysis in October 2007. The S&P 500 was trading at all-time highs. So he was being wise, at least he thought, to “not overpay”… to, instead, find “discounts” just like Warren Buffett does.
But Bill’s mistake to think a recent price discount means the stock is most certainly a better value todaythan it was just months ago.
And that’s false logic.
Essentially, Bill is mistaking discount for value.
Or as Warren Buffett would put it, he’s considering price (what he’s paying)… but not value (what he’s getting).
It’s an easy mistake to make. As I said, most investors fall into this trap.
But it’s our job here at Dent Research to help you avoid it! Knowing about it is the first step.
Tomorrow, I’ll share with you some interesting statistics on the trap of buying stocks at a “discount.” I’ll show you how Bill’s “discount” stocks fared just after he bought them, through early 2008.
I think my message tomorrow will help you avoid some costly mistakes this earnings season. And of course, John Del Vecchio’s online exclusive next Thursday will help you find some truly valuable opportunities.
Don’t miss either.
To good profits,
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research
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