The operative word here is only , I have seen far too many causalities where the projected numbers have looked fantastic and people invested without bothering to understand business and the story have had miserable returns
What to do when you are really optimistic about future of the company want your customers to buy ?
Take out an excel and start to put fancy projections, numbers never lie and when given an ascending pat they present a rosy picture to gullible investors
Don’t believe me ?
See the below extract from a brokerage report on Phoenix Lamps, obviously the brokerage house was gung-ho about sales projections and profit projections.
Excel work
Actual results were not as rosy as excel and the stock predictably nosedived
As an investor how can you avoid it ?
Should you stop using any tool for financial projections ? I would not recommend that but use excel or for that matter any tool as an aid and not as decision maker.
Make investing process a little simple, write these simple questions and answer them in writing before making any long term investment
What does the company do and how it creates value (earns money) ?
What part of value is reflected in the operations that they have today and what part of it is future value they are going to create ?
Is management crooked or minority unfriendly?
Can I explain this investment to a 7 year old ?
As in life in investing too remember to focus on inputs as output will largely be driven by quality of inputs
Do you want to answer these questions for your long term investments and high conviction ideas in comments below or on Facebook – Lets start conversation and see if the excel bug has bit us :)