My Personal Comprehension Of Risk Versus Reward - Part IV
(continued)
After risking a peek at such risky matters, let’s now rid ourselves of risk. And we can do better than a freezer stash. We can generally conclude now that stocks that are not profitable, are growing slowly, and haven’t enough money to pay their bills, but have the potential to rectify these matters, are risky but might reward us. We have also concluded that such rewards come at the price the gambler pays. Alternatively, by finding stocks which represent less risk but are simply not priced according to that risk, we are provided with opportunities for low risk gains. Let’s go hunting.
When is a stock priced badly? Well, if it is making, is growing rapidly, can pay its bills, but is trading at a discount. Often this happens from bad press (sometimes with good reason). Sometimes, its because a stock is so boring that not enough people are watching it. Other times it’s because the stock’s price simply hasn’t caught up yet.
The two main things a company represents: an entity that makes assets, and an entity that has assets. You buy each of these with every share you get. We can place a relative value on these. Price per earnings and price per book. It’s not unusual to find companies that are trading with either of these at 40. In the event that we can find profitable companies, which are growing rapidly, which can pay their bills, who don’t have bad press, but are still trading near book value per share or are trading at only a few times their earnings, then we suddenly have, what seems to me, something very special. Even in bad markets, these can be wonderful things to find. If we do tip into a bear market, the stocks already trading at 40 times their earnings have a lot of room down. What about the ones at 5 times their earnings? A lot less room to fall, if they even fall.
We just committed carnage. And we just eliminated most of the favorite stocks out their. Are there many to choose from? A month ago? Certainly. Even now? Even more.