Topic: How To Invest

What is Pat’s commentary for the week of June 1, 2021

Article Excerpt

Our long-time readers and clients know we’ve developed a number of rules to evaluate stocks and the actions of companies. These rules are all based on what we think of as “financial physics”. They grow out of human nature, which spurs people to take advantage of financial incentives. These rules highlight tendencies, not certainties. But they help us sort through the many opportunities available in the stock market. Here’s one rule—we call it a wariness factor—that we often mention: Growth by acquisition is riskier that internal growth. That’s because the seller of corporate assets almost always knows more about the assets than the prospective buyer. If you make enough acquisitions, you are bound to buy something with hidden problems. Eventually, these problems come out in the open and hurt the acquirer’s earnings. Growth by acquisition can also warp the thinking of company managers. After all, their pay varies, up to a point, with the value of the assets they manage. This introduces an…