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Investing 101: Don't Pick Stocks, Pick Companies

In the late 1990s, I was a young investor. I wasn't foolish enough to participate in all of the hoopla. Truth be told, had I any money at all, chances are, as with everyone else, I would have been toasting the Internet's arrival. Fast-forward almost two decades later. What sparked the Internet bubble is still a hotly debated topic today -- picking stocks. Young investors are unsure of what method works the best. Is it active investing or taking a more passive approach, also known as buy and hold?

This is where both your values and investing objectives have to be considered. I don't believe that one method is necessarily better than the other. I'm sure there will be those who disagree with me. But investors shouldn't make the mistake and believe there is anyone sophisticated and well informed enough to consistently make the right decisions on any given information -- at least not legally. The market is too inefficient. This is another lesson that investors much learn quickly.

What I do know, though, is the market makes winners and losers out of everyone. More often than not, the only thing that separates a winner from a loser is time.

To that end, what a young investor needs to focus on more than anything is the earnings that his/her companies are able to produce. There's really no point in investing without first understanding how earnings work. To put it into simplest of terms, a company's earnings are its profits.

Essentially, you take a company's revenue, whether it comes from goods or services, subtract all the costs to produce that product or the service, and what's left over are the earnings. The earnings are then divided into the share amount outstanding, which results is the metric called earnings per share, which is essentially what every company's credibility is based on.

As noted, during the dot-com era, stocks outperformed the earnings companies were able to produce. Buffett's quote, if you recall, was in the inverse order -- the business should do well first and then the stock, not the other way around. As everyone got burned, Buffett was protected. Young investors need to realize that if there are no earnings, which is another way to say profit, there's no point in investing. I can't make it any clearer.

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