Online Stock Trading

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Let’s get complicated. First though, let’s create a fundamental definition: it’s not the risky aspects of a company that will translate into that which will reward us. In other words, a company’s lack of profitability will never reward us directly. The reward is what happens to a stock’s price, should it lose that which makes it risky. Major point: not all risky stocks have the potential to be rewarding. This little fact will become our holy grail.

Now, let’s include some more variables: growth, cash and margins. A company that is not growing, can’t pay its bills, and has low margins, is a risky stock. However, remember, none of those things will do for us a damned. So what’s the function that translates risk into potential reward? We just walked right over it. Potential. If that pig can turn things around, then we have no pig.

If you’re particularly bright, as most of my regular readers tend to be, something might be dawning on you: you might notice that we’re sitting here with a potentially risky stock wondering if it has the potential to eliminate the things that make it risky, so that it can reward us with a new and improved stock price. Wonder away. Now suddenly, we’re gambling.

Think about the problem this way: if a stock is not profitable, isn’t growing very fast, and has relatively low margins, it should be priced accordingly. If we think it has the potential to turn things around, we might want to buy it. However, if it were widely believed to possess the potential to turn things around, it should be priced accordingly. If we want to buy this stock, we would either, contrary to the widely held beliefs about its potential to turn things around, have to have some reason to believe that those beliefs were wrong; or, we would have to believe that the stock, for some reason, was not priced accordingly. If we are right, we would be rewarded for the miraculous suspicions we held that flew directly in the face of even what the very managers of the company are saying in their publicly filed reports. We would be walking up to craps table with our fingers crossed.

But here, we’re no gamblers. We’re thinking men and women. We’re the imaginative few who think things differently and because of this have access to, in the very least, knowledge of all the available possibilities. We’re the chess players on Wall Street.

So we aren’t going to pretend that our private analysis of the merits and drawbacks of a company are somehow mysteriously superior to everyone else’s, but we can find stocks who are not priced accordingly. People can do this all the time. Well, not very many—men like Warren Buffett come to mind though.

Let’s next finish this thinking thing of ours.

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