It is the Business that Matters

IT IS THE BUSINESS THAT MATTERS

Analyst upgrades and chart patterns may be fine tools for traders who treat Wall Street like a casino, but they're of little use to investors who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.

Over the long haul, stock prices tend to track the value of the business. When firms do well, so do their shares, and when business suffers, the stock will as well. Always focus on the company's fundamental financial performance.

Wal-Mart, for example, hit a speed bump in the mid-1990s when its growth rate slowed down a bit - and its share price was essentially flat during the same period. On the other hand, Colgate-Palmolive posted great results during the late 1990s as it cut fat from its supply chain and launched an innovative toothpaste that stole market share - and the company's stock saw dramatic gains at the same time. The message is clear: COMPANY FUNDAMENTALS HAVE A DIRECT EFFECT ON SHARE PRICES.

This principle applies only over a long time period - in the short term, stock prices can (and do) move around for a whole host of reasons that have nothing whatsoever to do with the underlying value of the company. We firmly advocate focussing on the LONG-TERM PERFORMANCE of businesses because the SHORT-TERM PRICE MOVEMENT of a stock is COMPLETELY UNPREDICTABLE. (Benjamin Graham: In the short term, the market is like a voting machine, however, in the long term it works like a weighing machine.)

Think back to the Internet mania of the late 1990s. Wonderful (but boring) businesses such as insurance companies, banks, and real estate stocks traded at incredibly low valuations, even though the intrinsic worth of these businesses hadn't really changed. At the same time, companies that had not a prayer of turning a profit wer being accorded billion-dollar valuations.