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Make Mine Medium Rare

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The Daily Diatribe: In the world of investing, the easiest thing in the world, as a salesman, is to appeal to somebody’s greed. You have all received a phone call in which some stockbroker sitting in a sweatshop in lower Manhattan offers you the opportunity to get in on the ground floor of a golden opportunity. It might be that some drug company is on the verge of developing a pill to cure cancer, or some other such can’t miss deal, and if you get in now, you can make a bazillion dollars; generally, in just a matter of hours. Well, of course, all of that is baloney; but because it appeals to your greed, you just might foolishly pull the trigger. After all, whoever does invent a drug that cures cancer is going to make a bazillion dollars, and innately, you know that; why not you?

Folks, in the biz, we call that sizzle. The guy is appealing to your lustful desire for money. There is no denying that sizzle is attractive; heck, we might even call it sexy, but sadly, when it comes to investing, the sexy stuff generally carries with it the highest risk.

No, what you want is the steak without the sizzle. It’s the actual, tangible pieces of the story that you want to sink your teeth into. Who’s the management? What track record do they have of increasing earnings and margin percentages? How do the numbers stack up against their peer group? Do they pay a dividend and is the dividend yield higher than the industry averages? Are their debt levels lower than the industry average, the price to earnings ratio, etc.? Those things make up the fundamentals, and without those, you have nothing to hang onto.

Lastly, I want to make absolutely certain that the earnings per share going forward are going to be positive. I want to know that first quarter of this year beat first quarter of last year. That is my final tangible proof of economic and management excellence.

So, when it comes to evaluating investments, you want a Cowboy Rib-eye, seared on the outside, and pink on the inside. Hold the dessert.

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