You Should Really Avoid this Portfolio Building Mistake
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
The inability of the masses to grasp investment community and corporate jargon are problems that keep us awake at night. Due to the confusion that drips from financial words such as “deep dive”, “euro headwinds”, and “haven flows” finance is generally ignored by people other than to pay bills or drop money into a 401k (do you even know what “401k” stands for?). There is another problem we see as well, geared more towards the subset of the population that has bought a stock in their existence on planet Earth. The problem, as we characterize it for our club, is “bubonic textbook plague”, or the spreading of investing words of wisdom from great book to great book, with slight tweaks through ten years. In this financial plague, the population is all taught the same investing principles and could rattle off a couple of the axioms that were penned years ago by a now dead person. Unfortunately, there is no understanding of the concepts, and putting them into practical application is rarely done.
Today we want to highlight a good example of textbook plague in action with the “cash is king” mantra. Over the years, legions of investors have been trained to think that if a company is generating cash every quarter than all is fine and dandy, and to buy the stock and forget about it. What they likely do is head to a company’s cash flow statement (sound smart: CF), see that ABC company produced $4 billion in operating cash in a quarter, then go to the TD Ameritrade account and click “buy.” Why is this a problem? For starters, investors have to decode if a company is earning what we call “fake cash.” The definition of fake cash is tricks a company uses to make their operating cash appear more robust than it is in actuality. To do this, companies may opt to buy less inventory (which is no good as it indicates consumers are buying less product) or “add back” a non-cash item.
Without getting too horrifically boring, if a company losses money on an investment that causes a hit to profits, it will add that loss back to operating cash as it’s not a cash outlay.
Our editor Brian Sozzi would read this shenanigans as…
…a whole bunch of fake cash! The company had lower profits compared to the prior year and its total cash was influenced by one of those “add backs” and fewer purchases of inventory. The stock market would probably spank the stock.
• The fun Twitter hashtag to shoot at @DecodingWallSt @BrianSozzI, with a comment, on this topic is #FakeCash.
Decoding Wall St. is an interactive, online investor education platform designed to teach the masses about investing and the world of Wall Street in a fresh, easy to understand way. For those aspiring to become investors, or those relatively new to the world of investing, our Gumshoe membership teaches you everything there is to know about what the “experts” are talking at you on a daily basis. As for industry pros, our Sleuth membership helps to decode all of the nitty gritty stock market facts and jargon you love, and then guide you to winning stocks based on that knowledge. Both membership options provide the member with direct access to Editor in Chief of Decoding Wall St., stock market/investing expert, and media personality Brian Sozzi. www.decodingwallst.com As for industry pros, our Sleuth membership helps to decode all the nitty gritty stock market facts and jargon you love, and then guide you to winning stocks based on that knowledge.
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