Opportunity Through Insight

People’s opinion of a company’s future potential is a key factor upon which the stock market is built. Therefore, as an analyst, it is important to not only understand the fundamentals and the strategy of companies in which you are looking to invest, but also how the rest of the market is viewing the stock’s prospects. This level of understanding will help interpret abnormal swings in a stock’s price to determine if it is simply an irrational reaction to a given event or a sign of larger issues.

In a previous post, I wrote about the non-measureable aspects of stock analysis and human emotion is one of the largest, unquantifiable factors driving movements in market prices. Having the insight to separate irrational price movements from the pack is a key factor that can lead to positive future investment performance.

I’ve come to learn that much of Wall Street is very short-term oriented, which can lead to these types of price movements. A classic example is when a company enters into an investment phase to develop new products, expand into different geographical markets or update its technology infrastructure. These spending programs are often needed to transition a company to its next growth phase, typically a good thing to invest in. However, this pressures a company’s growth prospects in the short term shares generally take a beating.

These types of situations are opportunists we love to find for our clients, but require a thorough understanding of the company’s growth strategy and insight to gain confidence. This also requires a longer time horizon and likely an above average risk tolerance, both in exchange for outsized potential returns.

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