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Introduction
B. “Great Stocks” vs “Grief Stocks”
Generally, a Great Stock has a long history of providing investors
with a consistently superior rate of return and solid prospects for
continuing to do so during at least the next five years. A Grief
Stock has no such record or prospects. Instead, in the past, it has
provided long-term investors with relatively low and erratic
returns and has little likelihood of significantly improving its performance.
The Fundamentals of Return. The size and consistency of a stock’s
rate of return is ultimately determined by the extent to which its
price increases or decreases after it is purchased.
There is a well-established relationship between growth in a company’s share price and growth in two of the company’s so-called
“fundamentals”; namely, growth in the company’s revenues; and,
growth in the company’s earnings. This relationship is expressed
in the following quotation.
The Fundamental Relationship
“Over the long term:
Growth in a stock’s price
is driven by
Growth in the company’s earnings
which is driven by
Growth in the company’s revenues.”
– Almost Everyone, Everywhere
The above quote, while hypothetical, reflects a relationship that
would be affirmed by almost all stock market theoreticians, portfolio managers, security analysts and gurus.
Of course, a stock’s price will fluctuate in the short term in
response to all sorts of emotions (principally fear and greed) and
Finding Stocks in the “Buy Zone”
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