Chapter 8: Forget Everything You Thought You Knew
1. Some
of the ideas that will not work for us include:
a. Efficient
market theory (i.e., a theory which olds that all information is already
reflected in the price of a stock).
b. Buy
stocks of low PE ratio or PEG ratio (because low-priced stocks often have
little to no earnings at the time they are poised to become breakout stocks, or
show earnings that are cyclically depressed).
c. To
rely solely on static Return on Equity (ROE) measure (because what matters is
the trend or direction of ROE achieved by a company).
2. As
a rule we want our companies to be profitable (although they may have stumbled
and became low-priced stock). When the low-priced stocks are still profitable
in the worst of times, it is an indication that management knows what they are
doing and can return to higher profitability levels in short order.
3. However,
if the stocks are not profitable, there needs to be some reason or catalyst
that we can see that will restore the bottom line to black ink in a relatively
short period of time.
4. Researching
low-priced stocks to find potential breakout winners requires a different
thought process than you may have learned about in the past. We do not pick the
same old stocks in the same old way. That would give us the same old results
and that is not what we want to accomplish.
We are looking for stocks that can breakout in a big way and show profits of several times our purchase price.
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