Chapter 1

Introducing Our Investment Process

How should decisions be made on buying, selling, and holding stocks? In a perfect market, those decisions are made on the basis of fundamentals. In this case, we mean the specific characteristics investors feel are important when selecting a company for their equity portfolio.

Of course, the fundamental principle of the market is that prices at the moment are based on expectations of a company's performance in the future. The price today reflects how investors collectively believe the company will perform days, weeks, months, or years from now.

Time horizons come into play. Long-term investors are using their views to forecast a company's results perhaps five years from now, or three, or two, or next year. Investors with short horizons who are seeking to capture quicker profits likely are projecting results in months. Thus, prices are based on expectations and predictions and the future. No one can predict the future accurately. Some investors who do it better than others make a lot of money, for a while. Hopefully, their talent never leaves them.

What do we mean by a company's fundamentals? In sum, they focus on the ability of management to generate certain levels of revenues and cash, and to run their operations effectively, resulting in profits and excess cash that are reinvested to achieve more revenues and cash, which drive the stock price higher.

An accurate analysis of a company's historical fundamentals is the staging point of ...

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