The Alchemist: How Much Information Do You Need?

Posted in Money Matters on December 9, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “How Much Information Do You Need?”


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The Alchemist: How Much Information Do You Need?

by Al Thomas


You have decided to buy some stock or mutual funds, but
wonder which one to buy. You need more information so you call your
broker for advice. A so-called “full service” broker will bury you with
all kinds of reports, analysis sheets and other pretty pieces of paper,
but will probably try to sell you something that makes him the most
commission.


Let’s see. What does Wall Street think you should know? Of
course, you will want a company that is currently favorable or “hot” -
like WorldCom used to be. Then you need to look at their financial
statement that has been audited by a big accounting firm. - like Arthur
Andersen. You really should check to see if they have any big
outstanding financial obligations that have little asterisks next to
them in the Annual Report - like under funded pension plans.


Of course you will want to get their financial statement to
check their P/E ratio. That’s Price/ Earnings or how many years of
earnings it will take to make back the price of the stock today. The
lower that number the better. For many years the average has been about
14. If it is above 20 or 30, well ??? We won’t factor in the rate of
inflation that will dilute the buying power year after year. And there
are lots of other numbers like this Wall Street says you should be
studying.


Maybe it is easier to buy a mutual fund. You can go to
Morningstar for every bit of information about a fund you can think of.
They will show the breakdown of the funds’ portfolio, but that can
easily be 6 months old. They do have those star ratings. From one to 5
stars, but I can’t recall seeing any one star funds and hardly any 2
stars. Why? Well, I think they don’t want to offend the fund manager
even though he is not making money for his clients.


In fact, they love to give 5 stars to funds that have had
losing years one after another. Unfortunately some of their information
is out of date. They do list all the stocks the fund owns, but the fund
may have sold them so you can’t tell for certain what they are investing
in.


Brokers want to send you reports, graphs, company updates,
interim reports and I don’t know what all, but stop and ask yourself,
“If I can get this so can everybody else so what good is it?” Now you’ve
got it. None. All that information will not tell you that after you buy
it it will go up - and that’s all you want to know.


Basically there are two things you want to know. 1. Is it
going up? 2. If it goes down where do I sell it to protect my capital?
That’s all the information you need.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.