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Action Plan

The first rule of operating in any environment is, of course, to know the terrain. For investors, that means understanding the terminology and the analytical underpinnings upon which many in the investment world are basing their assumptions. The next step, though, which involves looking ahead and trying to anticipate what might happen down the road, usually requires more digging—to discover facts and trends that are not necessarily relevant now, but which might be in the future. One useful starting point is to explore whether current approaches are the best ways to evaluate the risks and opportunities. Is the marketplace looking at all the relevant factors and time frames? Arguably, this is a tall order, and one could easily assume that those who get paid to do this for a living have already done the dirty work. Nonetheless, as in the Hans Christian Andersen fable, “The Emperor’s New Clothes,” sometimes those who are caught up in the status quo cannot—or will not—see the realities of the situation.

This brings to mind a whole range of questions that investors can—and should—ask. For example, is the investment community actually using “metrics” that matter? While the term took on ridiculous connotations during the Bubble years, it nonetheless describes a range of possible measures than can be used to assess value and investment potential. It makes sense, of course, to get rid of any half-cocked clutter, such as “eyeballs,” that clearly does not show a consistent degree of correlation to hard-dollar activities. Once past that, though, explore the analytical slant of the professional crowd more closely. Are they focused on revenues, earnings, or capitalization? Depending on the industry, all of these attributes play some role when it comes to evaluating potential risks and rewards. However, an excessive emphasis on one to the exclusion of others can occasionally mask a fundamental weakness that might have negative consequences later on.


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