Monday, 6 February 2012

Be careful with companies in formation - Wait For Earnings

Without Earnings, Nothing To Measure

Graham was suspicious of 'hot' or fast-growth stocks because their promise relies on the prediction of ever-increasing future earnings with little historical evidence that the company can consistently produce ever-rising future earnings.

He warned the growth stock investor to seek two things:

  • Assurance that growth will continue
  • Assurance that the investor isn't paying too high a price for future growth.

Peter Lynch warns investors to be especially careful with companies in formation.  "Wait for earnings," he cautions.

  • Though Lynch has done very well with some initial public offerings in particular (he was an original investor in Federal Express, "I'd say three out of four have been long-term disappointments."

Venture capital operations

Many high-tech, bio-tech or other emerging technology companies operate more like venture capital operations.

Venture capitalists demand guarantees of high returns because the risk is high that earnings will be slow in arriving, or will never materialize at all.

The venture capitalist is betting on a technology and the talent to put that technology into use.

Venture capital investment is best practiced by those who know a particular industry extremely well.

No comments: