Understanding Stocks
Understanding Stocks
Understanding Stocks
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92 UNDERSTANDING STOCKS<br />
Talk to the Managers<br />
Many investors who use fundamental analysis believe in talking to the<br />
CEO and company managers to get a feel for how the corporation is<br />
being run. Ideally, when you speak to management, you can ask how<br />
the business is doing, where it will be spending its money, and who its<br />
competitors are; you can also get insights about the corporation. Questioning<br />
managers is something that many professional fund managers<br />
do. They want to invest in companies with experienced, innovative<br />
managers who have a vision for the future. They try to avoid companies<br />
that have too much debt, are losing business to competitors, and have<br />
other liabilities (like lawsuits) that can affect earnings.<br />
As an individual investor, it is highly unlikely that you will be able<br />
to sit down with the CEO or upper management to share a drink and a<br />
game of golf and to try to find out exactly what is going on in the corporation.<br />
And even if you could, it is doubtful that the CEO would say<br />
anything negative about the corporation. That is why management<br />
interviews are somewhat controversial and why some professional<br />
investors would rather study the balance sheet than talk with managers.<br />
Company Insiders: Watch Them Closely<br />
According to the SEC, officers and directors of a corporation who have<br />
access to proprietary information and people who own more than 10<br />
percent of the corporation’s stock are considered corporate insiders.<br />
You can get clues to how a stock will do by looking at whether insiders<br />
are buying or selling the stock. To find what insiders are doing, log<br />
onto Yahoo! Finance (finance.yahoo.com), CBS Marketwatch (www.<br />
marketwatch.com), or Bloomberg (www.bloomberg.com). In addition,<br />
the SEC’s Web site, www.sec.gov, manages the EDGAR (Electronic<br />
Data Gathering Analysis and Retrieval) database, which contains many<br />
fascinating financial documents about the actions of insiders.<br />
Some investors have created strategies that involve copying insiders.<br />
After all, insiders are more knowledgeable about the future<br />
prospects of the company than others are. On the other hand, there are<br />
problems with tracking insider transactions. Sometimes insiders buy or<br />
sell for reasons that have nothing to do with what is happening at the
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