Consider this Hypothetical…

I want you to consider a hypothetical scenario. Let’s say you’re given two bits of information on a company from the future.

First, you’re told that the company is about to release a product that will become a big hit. The technology is superior to what’s out there and the price is much cheaper. The public will love it.

Secondly, the company operates in a country whose currency is about to appreciate against the US dollar.

My question is, knowing just those two bits of information, is the stock a buy? (Bear in mind, this is just a thought exercise.)

In my mind, the answer is yes, and obviously so. Yet, for many people, they don’t see it that way. They would shy away from the investment due to currency concerns.

The reason I bring this up is that this thought exercise spotlights the mistake many investors make when it comes to analyzing the stock market. They get wrapped up in the mechanics of the market and don’t pay enough attention to what the market is actually trying to do.

The products are the end result of the market. But you’ll notice that much debate is about the details of the market. What do I mean by this? You’ll hear constant jabber about the Federal Reserve, the impact of buy backs, valuations, politics, currencies, inflation, the CAPE Ratio and on and on.

While these have a role to play, they’re dwarfed by the most important factor and that’s serving the public with better goods and services. If you’re doing that, you’ll override the mechanics of the market, and if you can’t, you won’t. It’s that simple.

I remember Peter Lynch saying that if you’re looking to buy a car company, you should be reading Road and Track, not the Wall Street Journal.

This is a generality, but a poor balance sheet typically isn’t the ruin of a bad company. Rather, it’s poor performance in the marketplace that begins the wreckage of the balance sheet. The company may use bad finances to mask the damage, but the starting point is that the company’s products could not compete.

When looking a potential investment, don’t overthink this crucial factor. The company must be a winner in its marketplace in order to thrive.

Posted by on May 21st, 2019 at 7:46 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.