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I don’t think that you should invest based on the Democratic or Republican conventions being televised. The truth of the matter is that the affect of a President’s party or the convention to select him is too infrequent to have any statistical significance. There is no way that a Confident Investor could surmise that a specific stock will rise or fall based solely on the political party of the President of the United States of America.

Even though I don’t think it is a wise investment strategy, it is interesting to engage in trivia discussions over wine, coffee, or the water cooler with fellow investors. So in that spirit, I reference a recent article on MarketWatch.  I am only putting two of the paragraphs here but it is probably worth your effort to click over and read the entire article.

In the 16 presidential election years since 1948, the S&P 500-stock index has risen during 11 Republican conventions, as measured from the start to the end of the convention, according to a report by S&P Capital IQ. In contrast, stocks notched gains during only seven Democratic conventions.

When markets reacted favorably during one convention, they tended to drop during the opposing party’s convention. That suggests that if markets rise this week while Republicans are meeting, the odds are, stocks might drop when Democrats hold their convention in Charlotte, N.C., Sept. 3 to 6, says Sam Stovall, chief equity strategist for S&P Capital IQ.

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I recently started a thread of discussion regarding why I avoid companies that are unprofitable. The topic is fairly long so I am breaking it up into several posts. You can see the first posting here.

There are times that you will want to invest in unprofitable companies. However, this has to be done carefully and with a small portion of your investment portfolio, perhaps 10%. For this 10% of your portfolio, you can invest in more speculative offerings.  Some speculative offerings such as high-tech startups or biomedical startups typically have a fairly long run of being unprofitable as they work through their startup issues.

It is essential to analyze these types of companies carefully. You want to fully understand the business. You need to understand why they are still not able to create enough revenue to cover their expenses. Most importantly, you need to see that this gap is getting smaller rather than larger. You need to see that revenue is increasing and the costs of the company are being effectively controlled by excellent management.

Finally, you need to make sure that the future profitability event is from being well-run and not a Hail Mary pass that may not materialize. Counting on FDA approval of a drug when no other country has approved the drug, and it still has several rounds of testing to go, is not a safe strategy. Counting on a corporate takeover of an IT startup so that a large company can take advantage of “really cool technology” is not a safe strategy.

In other words, you need to be extremely cautious and very concerned about a company that is not profitable. It may have a significant path to profitability, but I suggest you are extremely diligent in watching its progress.

This is the last of my current series of posts on the subject of focusing on profitable companies to invest in rather than unprofitable ones. Personally, I stay away from all of the unprofitable companies as there are just too many good companies to watch. I don’t need the complication of trying to find that one company that is about to break out and be successful even though they were not successful in the past.

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I recently started a thread of discussion regarding why I avoid companies that are unprofitable. The topic is fairly long so I am breaking it up into several posts. You can see the first posting here.

This is the argument of lost opportunity costs. I understand that an unprofitable company could have an extremely significant increase in stock price as it regains profitability but why risk it? There are good companies to invest in that are well-run. Some of those companies, I list on my Watch List.

If an unprofitable company that obviously does not have excellent management (or it would not be unprofitable) does not make a comeback and continues to hemorrhage money, then your investment could drop significantly.  This is compounded by what you could have made from a well-run company.

Let’s do a quick example. Perhaps you invest in $10,000 in a company that is not currently profitable. Your theory is that the worst is behind the company and they are about to do much better. Your theory is that other investors will be impressed with this increased performance and make the stock price move up.  These two combined theories contradict recent historical reality.

First, the company did not effectively react to events that caused them to become unprofitable. Why do you think that this is the time for them to get their act together and reverse this problem?  What if you are wrong?

Second, the potential investors may not be impressed. What if the investment community wants to sit back and wait to see if the company can continue to be profitable? What if they wait for a quarter or two of continued improvement? It is not unusual for investors to wait 4-6 quarters before they believe that the company has fixed itself.

If one or both of your theories is wrong, your $10,000 investment could easily drop 10% in 6 months. Compare that to a good company that is simply executing like it always has and increases the stock price by 10% per year (or 5% in the same 6 months that you have been waiting). Your lost opportunity cost is not just 10% or $1,000, but is 15% or $1,500 of what it could have done in a well-run company.

If you want to be notified when I post about avoiding unprofitable companies, there are several straightforward ways to do this. You can subscribe to my feed in your news reader. You can also sign up for my weekly newsletter which will give you the articles for the week. Finally, you can subscribe to my Twitter account @ConfidentInvest.

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I recently started a thread of discussion regarding why I avoid companies that are unprofitable. The topic is fairly long so I am breaking it up into several posts. You can see the first posting here.

One of the biggest reasons that you should avoid unprofitable companies is that it is indicative of a failure. It shows that the company has failed in developing and executing a plan that will keep the company profitable. I have never seen a plan that has a profitable company intentionally becoming unprofitable.

Let’s be clear, the issue is not an unprofitable company that is getting better (or approaching profitability). This happens on a regular basis especially for relatively young companies. In this case, I am talking about a company that was profitable and now is not profitable.

In every case of this profitability downturn that I have ever examined, the issue is always that factors turned against the company that the management did not prepare to overcome. These factors could be changes in the pricing of commodities, changes in economic situations, changes in competition, or many other changes. Regardless of the unforeseen change, the real issue is that it was unforeseen and the management did not take effective steps to anticipate and eliminate the change.

So why are you considering buying the stock? Did the board of directors swap out the management of the company?  Did the board of directors swap themselves out? All of them are culpable for the bad decisions and lack of leadership. Why do you think they are smart now when they weren’t before?

There are companies that have better management than the money losing company. While past success or failure is not indicative of future success or failure – it is better than operating in a naive vacuum.

If you want to be notified when I post about avoiding unprofitable companies, there are several straightforward ways to do this. You can subscribe to my feed in your news reader. You can also sign up for my weekly newsletter which will give you the articles for the week. Finally, you can subscribe to my Twitter account @ConfidentInvest.