Long Run Earnings, Short Run Emotions! FRAT VidEx

Long Run Earnings, Short Run Emotions!

May 21st, 2009, By ChuckC at http://TheMarketsUpChuck.com/

For the long-term stock investor, the mother of all principles is that earnings determine returns. By simply reviewing historical earnings alone, you can instantly ascertain how well shareholders were rewarded. The higher the growth rate of earnings over time, the higher the shareholder returns are. The lower the growth rate of earnings, the lower the shareholder returns are. Additionally, if earnings are rising, shareholder assets are rising, if earnings are falling, shareholder assets are declining. The more cyclical earnings are, the more cyclical returns will be. The more consistently earnings growth, the more consistent and predictable return will be. This is common sense, and varies from industry to industry and from company to company. In the long run, this can be relied upon with great precision and therefore is of immense importance.

Investors are often confused and thus become distracted from the earnings principle. This is due to the fact that human beings by nature are emotional creatures. Therefore, emotions can temporally override reason, causing apparent exceptions to the rule. Fear or greed can cause a stock to be overvalued or undervalued in the short run. This is why yesterdays blog on the importance of valuation is so essential to making sound and profitable investing decisions. Intelligent buy, sell or hold decisions can be successfully executed when you recognize that earnings will inevitably dominate. Todays FRAT™ Videx™ offers compelling real world evidence of the indisputability of the earnings rule.

As a result of weak stock market returns over the recent past, many are questioning the validity of the buy and hold investing strategy. This is the kind of prejudgment based on over-generalization that makes me crazy. Buying and holding any company at any valuation may or may not work. It all depends on the growth characteristics of the actual company, and for even the best companies, the value you pay. Investing in the right company at the right price based on valuation will always work.

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Education

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• Long Run Earnings
• Short Run Emotions! FRAT VidEx