To Buy or Not to Buy: How can you know if you should invest in a particular stock? [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
I believe regardless of the industry we’re in, we must learn how to invest. This is one of the vehicles that will help us achieve both short-term and long-term financial stability.
Today, let’s focus on investing in the stock market.
When buying stocks, how do you know which one to buy? What are the factors you consider when looking for a particular company? Do you conduct a background check first before investing in a particular stock?
Warren Buffett, CEO of Berkshire Hathaway and arguably the greatest investor of all time, has an interesting insight that you should keep in mind when investing. He actually uses this principle when hiring people but it’s also applicable when making financial decisions.
Know more about today’s tip by reading the article below. We hope you find this useful in your personal investing strategies!
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
Berkshire Hathaway CEO Warren Buffett once said,
“In looking for people to hire, look for three qualities: Integrity, Intelligence, and Energy. If they don’t have the first, the other two will kill you.”
According to him, management teams and recruitment teams should have this mindset when hiring people. Determining integrity and deciphering if an applicant lacks integrity should be first and foremost.
Buffett’s “integrity, intelligence, and energy” principle makes sense. If you’re a business owner, leader, or manager, the last thing you’d want inside your company is a group of highly intelligent and energetic fraudsters.
They’ll be too good for you to catch and the next thing you know is they’re taking you and your business down!
Integrity, Intelligence, and Energy in Investing
Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist at Altimetry Financial Research, also follows Buffett’s hiring mindset in what he and his team do.
He states when they see bad business situations and want to advise their clients to not buy such stocks, they add those companies to Altimetry’s “Do Not Buy” list.
… and what is the primary criterion that lands a stock on their notorious list?
Lack of integrity in a company’s numbers, words, and business structure.
Professor Litman says around 100 companies have made it to their “Do Not Buy” list over the years. What’s common about these businesses is that their average returns are -50%.
Is Altimetry Financial Research doing some complicated mathematical forensics to know these details?
Professor Litman says they do that LATER in the process—they leverage complex models to further understand a company in question.
However, their first stage of Fundamental Forensics is something anyone, even those who are not in the finance industry, can do.
To know whether or not a company should be part of the “Do Not Buy” list, Professor Litman and his team look at the nature and location of a company’s headquarters. They search all the addresses listed in the Securities and Exchange Commission filings.
They also check the certified public accounting firm a company has chosen, run a background check on the CPAs, and examine the background of the management team as well.
Let’s use the case of NanoViricides, Inc. as an example…
NanoViricides is a nano-biopharmaceutical company engaged in the discovery, development, and commercialization of drugs to combat viral infections using nanomedicines.
The company’s nanoviricide technology directly attacks at multiple points on a virus particle.
According to Professor Litman, NanoViricides has made it to Altimetry’s “Do Not Buy” list because its CPA firm couldn’t even get its own audit fees correct in the DEF 14A filing.
The listed audit fees for the company were not even correctly written!
Here’s an actual photo captured straight from NanoViricides’ SEC database:
Take a look at the numbers. How come a six-figure dollar amount could have seven numbers in it?
That raises questions about NanoViricides’ chosen CPA firm.
Additionally, there are other reasons why the company is part of Altimetry’s “Do Not Buy” list. Its stock has dropped over 60% since Professor Litman and his team highlighted it in July 2019. According to them, the SEC simply doesn’t have the time or resources to police all the publicly traded companies.
Business Integrity is First and Foremost
Aside from looking at companies’ SEC filings, Professor Litman and his team run an analysis on the integrity of businesses’ data and even “audit” words and stories.
For example: Altimetry’s Earnings Call Forensics highlights and analyzes a particular management team’s verbal cues that may be ignored otherwise.
By doing these examinations and analyses, Professor Litman and his team determine whether or not a company is worth investing in and advise their clients properly.
Think about this metaphor: Would you ever lend money to someone without asking that person why he or she wants your money?
You probably wouldn’t!
As a money lender, your natural tendency is to ask that person first about why he or she is borrowing money. This helps you make sure the borrower won’t run away with your cash or use the money in doing bad business.
Apply that concept in the perspective of investing…
As an investor, would you easily buy the equity of a firm without first checking the veracity of its statements?
You wouldn’t, right? Highly likely, you’ll conduct background research first to make sure the company’s stock is worth putting your money into.
If you don’t do that, you’re putting your investment portfolio at risk.
The main takeaway from this?
Evaluating the integrity of a firm’s management team and their verbal and financial communications is paramount to the investment process and success.
Professor Litman says there is “business speed in trust.” No number of lawyers in the world can write up a contract that could account for every possible scenario in the business and investment industries.
At some point, investors would have to rely on their mutual trust and integrity with the management teams of the equities they seek to invest in to know that both parties can live up to the spirit of their agreements.
… and as a responsible investor, you also have to do your own research. Don’t simply listen to what others or the financial media say, and avoid emotional investing.
Apply the Fundamental Forensic strategies Professor Litman and his team do at Altimetry Financial Research instead!
By examining and doing a background check on the companies you plan to invest in, you’ll become a wiser investor, and you’ll also identify those that practice integrity and those that do not.
We hope you find today’s investing tip insightful and helpful!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
Valens Dynamic Marketing Capabilities
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