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Forget Valuation, It's A Numbers Game: Wall Street's Rules, Part 4

NEW YORK ( TheStreet) -- I've received quite a bit of criticism over the past couple of weeks for some pretty bold earnings predictions -- some of which were colorfully described by one reader as randomly "throwing (you know what) to the wall to see if it sticks."

It was much more sophisticated than that -- or at least I think so. However, I do realize that sentiment is often derived from the source of an existing bias. In other words, I'm a bum in the minds of those who disagree with my stock picks and a genius to those with whom I agree, regardless of outcome. Nevertheless, making the call is what it's all about.

More Than Just Being Right or Wrong

In the first part of this series, we talked about the importance of making investment decisions more about the bottom line and less about perpetuating the "rules of investing," or the sometimes unspoken myths that qualify your status as an investor but yield little in the way of results.

In the second part, we looked at the myths surrounding portfolio diversification, while the third part reminded us that, on Wall Street, it is true that a sucker is born every minute. In this article, we are going to look at the importance of understanding a company's business and, at times, focusing less on valuation.

The Game of Numbers

I argue that if investors truly understand the underlying business, being "near-term right or wrong" won't matter as much, which proved exactly the case last week.

Nothing on Wall Street is more exciting in my opinion than earnings season. I love this time of year because it reminds me of school. It's called "reporting period" because this is when companies put their records on the line and are issued passing or failing grades.

In a similar fashion, it gives me, as an analyst, an opportunity to make a buy or sell call on the assumption that a report will either be positive, negative or materially inconsequential.

The perfect example is Apple's (AAPL - Get Report) disappointing earnings results, which prompted Apple bears and Research in Motion (RIMM) bulls to start dancing in the streets.

But if truth be told, did one quarter actually change the company's narrative? Not really. Instead, it was a game of numbers where what was expected was disconnected from what the company produced, which was both 20% revenue and earnings-per-share growth.
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