Useful Causal Links
If we can't trust journalists, what can we trust? The answer may be a little provocative: ourselves! When it comes to investing, we really should do our own research. Aside from the ethics side of things, we need to estimate the value of a company. The causal link between a stock's price and its earnings power is strong in the long term. A stock may get beaten down due to whatever reason, but if it continues to grow its positive cash flow, its price will eventually reflect that. High earning power causes higher stock price. It is that simple!
Therefore, it is key to be able put a value on a company based on the outlook of its earning power. If the price is sufficiently below the value, then it is time to buy. Conversely, when the price rises much higher than the value, we should consider selling. Again, this goes back to doing the right fundamental analysis on a stock. If you're new to this blog, start by going to Fundamental Analysis or Rule #1 Investing.