There is a lot of industry specific and financial language used in quarterly/annual financial reports, and during company earnings calls. To new and even average investors this jargon is largely foreign, especially if it is an industry one is just becoming familiar with.
There is little doubt that it is more profitable and beneficial to try and understand the business details of your investments. The more you understand, the better your decisions. Unfortunately, it means becoming familiar with and deciphering the financial and industry terms used. Yet, on your path to becoming a sophisticated investor, the high desire to do this as quickly as possible can leave you overwhelmed and confused. It is very easy to lose your focus!
Fortunately, with most (stock) investments it all really boils down to determining and focusing on a few key issues out of the vast amount of information:
- How are they making money (in a general sense)?
- Are they making money (currently)?
- Can they continue to make money long term (sustainable business/industry)?
- How likely is it they will continue to make money going forward and at what rate (growth)?
- Are they doing anything that will negate making money in the long term (i.e. lose money)?
- How are profits being returned to you? How is the money going to come back to you in short and long term? (i.e. dividend? share value?).
- Is that amount going to be an acceptable return and within your initial expectations?
- Is the investment still performing it’s intended function? (see Function Centric Investing)
- Outlook/future, and
You will soon realize that you don’t need to have a 100% understanding of the language used, in order to determine what is going on in general. However, that doesn’t mean that you don’t need to do your homework and learn the terms & definitions used. That is still necessary. But as you become more familiar with each investment/company, you will gradually understand and pick up on the business details (important ones) while also learning the language used. The “jargon” will just become different names for representing different aspects of a single overall idea …. the money flow (in/out).
The list of items to focus on, are by no means a complete list. But they are what I’ve found to really be the essential meat that an investor needs to focus on, and will help you to avoid being hung up on the language and terms used.
Thanks and Happy Investing! – The Investment Blogger © 2014