The truth is that there are limitless ways to lose money in the stock market but only a few methods that work well over the long term. The majority of economic theories, market forecasts, trading strategies and hot tips do not work out. But fortunately, we can learn from history’s greatest investors such as Warren Buffett, Peter Lynch and John Templeton, with proven track records that made money over a long period of time. Even though these successful investors used very different approaches, they have one thing in common. They all confirm that the most important indicator of rising stocks in the long term is: EARNINGS!
You won’t find a single company that increased its earnings quarter after quarter, year after year, and the stock did not tag along. Or, try to identify a single company whose earnings declined quarter after quarter, year after year, and the stock advanced no matter what. You won’t! Not even in a roaring bull market.
But it is logical and not rocket science. Earnings are net profits of a business. They are what ultimately drive share prices and the reason is very simple. A share of stock is part ownership of a business and just how much investors are willing to pay for those profits will determine what a company is worth in the market. Although, stocks might be influenced by other events and special situations from time to time, you will find there is an extremely high correlation between a company’s growth in earnings per share and the movement of its stock in the longer term.
So, as a long term investor, simply forget all the technical market trivia about market breadth, trading volume, put-call ratios, short interest, mutual fund inflows, advance/decline numbers among many others. Instead realise that share prices follow earnings. When you focus and act on it you will be using a tried-and-proven investment strategy that will always pay off finally.
Sven Franssen