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Computerized Investing > March/April 2000

Listening to the Analysts

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by John Bajkowski

Unless you invest in index funds, you ultimately hope to beat the market. However, realistically, few individuals can beat the market on a risk-adjusted basis over the long haul. Benjamin Graham understood this difficulty and put forth that for an investor to beat the market he first must have a sound theory, then have opinions and projections that are not only correct, but also different from those of the market.

How often have you heard of a stock price falling on the announcement of increased earnings? Or, in these times, an Internet stock leaping up after reporting negative earnings per share? In these instances, actual earnings did not turn out as expected. Expectations play a key role in determining if a stock’s price “gains” or “loses” when actual earnings are reported.The market is forward looking. Stock prices are established through expectations and adjust as these expectations change or are proven wrong. Earnings per share EPS estimates involve the interaction of many company, industry, and economic forces. They embody an analyst’s opinion of factors such as sales growth, product demand, competitive industry environment, profit margins and cost controls. Earnings are a key variable used to value stocks and slight changes in expectations for future earnings or the earnings growth rate can strongly impact the stock price.

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