Daily Gains Letter

How to Pick Stocks Using Newspaper Articles in a Unique Way

By Sasha Cekerevac for Daily Gains Letter |

DL_Sasha_9Many people begin their hunt for developing an investment strategy by reading the latest business newspapers. This type of stock analysis, reading what just happened, is not a good long-term investment strategy.

To begin with, an investment strategy is about developing a plan for the future. What the newspaper reports today only discusses current events. In addition, one has to be careful, as the truth behind certain market moves is often far more complex than a journalist may let on (or even know).

The media is interested in selling content. No one would read a newspaper article in which the journalist stated that the stock moved for no reason. While in many instances there are events that are catalysts, for a long-term successful investment strategy, one must conduct far more thorough stock analysis.

To begin with, stock analysis is all about looking forward one to two years at a minimum. This gives an investment strategy time to develop, as opposed to fast-paced and short-term trading.

Newspaper journalists are not in the business for long-term stock analysis or developing an investment strategy to help you become financially successful. Their job is to sensationalize the news.

An investment strategy certainly does take more work than simply reading the headlines. One must have a balanced portfolio, in addition to conducting a thorough stock analysis of the companies one believes have a higher-than-average probability of exceeding market expectations.

One investment strategy that people can take advantage of is when the media over-sensationalizes a story without taking the long-term context into account.

A great example was the “London Whale” incident with JPMorgan Chase & Co. (NYSE/JPM) in the spring of 2012. This incident involved one area of JPMorgan’s business, the Chief Investment Office (CIO), which, through poor risk management, ended up allegedly costing the company $6.2 billion. (Source: “JPMorgan blames risk management for ‘London Whale’ loss,” Reuters, January 16, 2013.)

Now, a $6.2-billion loss is certainly significant. However, to put this in context for the long term, this amount is just over one quarter’s worth of net income. After all, JPMorgan has yearly revenue of approximately $100 billion and net income of roughly $20.0 billion, which will continue to grow over the next decade. While the initial one-time loss is significant, over the next decade, it will become essentially irrelevant.

At the time of the loss, shares dropped from approximately $44.00 down to $30.00 and provided a great buying opportunity, as the stock ended 2012 at $46.00 per share.

This is an incident in which an investment strategy that looks for media coverage that’s far too pessimistic can help you find a stock with a great entry point, as long as the stock analysis shows that the long-term strength won’t be affected by this one-time event. The average retail investor needs to start using the media as a contrary indicator.

After all, if one’s investment strategy was to buy a stock only when there’s good news, it would be very difficult to make money, as the stock’s price will be extremely expensive.

By adopting an investment strategy that uses a misallocation in market sentiment through the media along with thorough stock analysis that shows long-term strength, one should be able to enter positions at opportunistic prices.

This does take more work than simply reading the newspaper, but it will be financially rewarding over the long term.

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