Causes and effect (The Financial Athlete #101)

When analysts review why a football team won or lost, they never pinpoint one cause. They compare statistics on a multilevel with turnovers, penalties, 3rd down conversions, time of possession, sacks, and so on. More than one cause produces the effect of winning.

A simple minded investor of a stock stops due diligence with one hoped-for cause to predict the effect of a substantial price gain. This is his magic answer toward prosperity. It may be breakthrough patent, or a huge contract, or a buy-out priced at a steep premium to the market price.

Never settle for a magic answer as the sole reason to buy an equity. Consider the effect of the stock price if the magic answer fails to materialize. Will there be a sell off?

Stocks should be chosen based on a good price and the merits of the company (fait accompli) which will carry them toward further growth. Think of the magic answer as only a potential bonus.


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