The Enigma of the Street, How to Make the Best Guess

Needless to say, the Street is an enigma. One will never know enough what goes inside that big head of the market. That’s why speculations and guessing games happen. Investing in stocks is like gambling, if one doesn’t know the trick how to pick the stocks, it might cost them a fortune. Playing the stock market is thrilling. The adrenaline rush it gives makes it a much talked about wealth accumulation instrument. Picking up stocks is an art, not a science. It doesn’t have an infallible strategy that will guarantee success. In fact, it is a long and tiring process.

What makes the game complicated?

There are so many things about a company that it is just impossible to derive a formula that can ensure the success. Assembling a data is one thing and determining which ones are relevant is yet another thing. Apart from all the numbers, there is certain intangible information that can’t be measured or put into numbers. It is easy to lay hands on and measure the quantitative data such as net profit and revenue. But how can one measure the qualitative data like its reputation, staff? Competitive advantages, etc. Moreover, the strongest force that moves the market is the inherent irrational human element. It is very emotionally connected to the market. It thinks, predicts, speculates and acts likewise, influencing the market a great deal. There is no way to predict its movement. Human interference makes the street complicated all-the-more. And when the confidence of the force turns into fear, the stock market can be a very dangerous place.

Cracking the code:

There are just about a few things that one must know before picking a stock. Okay, a few many things may be, but for starters, take a few steps at a time.

Don’t invest in what you don’t understand:

Apparently, no one can understand all companies. So, take heed and refrain from investing in the companies that have a complicated business model, or whose work you can’t understand. The knowledge about the company is the biggest weapon for conquering the street. 

The best in breed:

Another key for the win is finding the best in the breed. This means picking the companies that have tremendously established or adamant and emerging brand. But some sectors are less ‘brand conscious’. But nonetheless, every company has the profitability factor. So stick with the best of the breed.

History matters:

Forget the saying that “Past performance does not guarantee future performance.” It’s different with the street. A strong past performer will deliver good results in future as well. So, peek into the history to know if the company has a steady earnings growth if their earnings are volatile and if it can sustain its growth?

Value is important:

Find the value that the street pays for the exponential growth of the company and the prospect of the future growth. Price to earnings and price to sales multiples aren’t the perfect gauge, but they help in knowing if the stocks are worth paying and how much should be paid. It is safer to invest in large-cap and mid-cap stocks.

Dividends and rule:

Go for the companies that pay dividend. It is not an edict, but it sure is assuring that the company is growing in revenues. But counting on earnings alone doesn’t reveal if the company has borrowed to the moon for creating these earnings. So, it is important to look into the balance sheet of the company as well.

Red flags:

Every company needs to detail the risk factors that may cripple its prospect. One should also be aware of the company’s accounting practices and operating assumptions on all kinds of depreciating rates and assuming rates.

No amount of information on the company can guarantee the earning since there are many intangible and unforeseen factors that influence a company’s earning and its worth in the street. Then again, it doesn’t harm to try playing safe.