Bean Counter's Guide to Investing: Part 1
The foundation of 20th Century equities investing was a buy and hold approach with value investing as the core principal. This was a simple mathematical approach usually involving p/e ratios, price-to-cash flow, price to book ratios and the like. Currently most of us have become momentum investors who jump around like bunnies between sectors and investing styles which make money short term.
No matter the investing style, a certain amount of financial analysis is performed, but this analysis is mostly on the financial side of companies.
If I were a CEO and my report card is the price of my stock - I would do whatever it took to maximize my company’s stock price. As the proven principals of stock selection are based on comparative financial modeling, I would focus on the company’s financials, giving investor benefits even at the expense of customers.
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This concentration on financial modeling has destroyed the buy-and-hold approach as the companies themselves concentrate on the short term (under 2 years). I believe this destroys or limits the potential of each company particularly when it involves impacts to the current financials.
As an example, high energy prices were always on the horizon and should have been part of any company’s forward planning. For the automobile industry, this translates to the ability to produce energy efficient cars and alternate energy powered vehicles. Compare the management direction of GM (GM) and Ford (F) (who were milking existing technology and shorting r & d) and Toyota (TM). R & D costs money, and so does major retooling.
We are not analyzing the technical structure and dynamics, nor the potential of the companies whose stocks we buy, and therefore buy-and-hold investing is doomed to low returns or failure. Our investing methods have “progressed” to a level where we do not need more than a superficial understanding of the company’s product.
Technical fundamentals and dynamics cannot be reduced and quantified on a spread sheet so they are simply ignored.
Disclosure: I have spent my working career pulling rabbits out of hats for the Bean Counter philosophy which is pervasive in business today. I hold no positions in the stocks mentioned.
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