23 May 2010

Investing Chill

Investing is fun. The hard part is learning how to read financial statements. But this is all you need to do and once you learn how it is enjoyable. There is no need to use a stock screener, no need to read the papers, no read to look for tips (but you do this anyway, as it can be fun). When you read a financial statement, look at a divergence or convergence between cash and earnings over 1, 5 and 10 years.

This gives you an a very well grounded view of whether the company is working as a machine to generate cash, which is the point of a company. This is a computational view of a company, input cash, output lots more cash, like an amplifier. But this is exactly what a company should do. When you do this you are testing it, like an electrician tests a circuit.

If you get involved in trading, which is different from investing as you get caught in the mechanics of technical trading programs, you will find divergence and convergence is a key concept, maybe the most profitable one. Why ? Because it shows a basis for a computation test, like the circuit, and computers are doing the trading (or rule programs used by a trader).

It is an important concept in investing because it shows whether a company is strengthening (converging) or weakening (diverging). It is possible to profit from a weakening company, either by selling your shares at a high or shorting them down. There is no need actually to get a statement, all you need do it look at MSN Money or Yahoo Finance (I look at both). Like anything when you do it enough, it becomes easy to do, and those divergences become pretty obvious. 

© 2010 Guy Barry - All Rights Reserved.