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Investing 101: Don't Be Fooled by Corporate Jargon

I appreciate that there's a certain degree of faith one should have in our corporate leaders, especially those the caliber of IBM with an above-average track record of strong cash flow production. But empty terms like "we're taking action to improve execution" are only as good as the implementation behind it. Retail investors should demand clearer language.

It's bad enough to have to dig through piles of documents to truly understand how companies make money. Investors shouldn't also have to decode the meaning of terms used during conference calls. Along those lines, investors should start demanding that management make their accounting as easy as possible to understand.

Given the complexities with GAAP and non-GAAP reporting, not to mention things like currency exchange rates and the impact on revenue, I do realize that not every investor will ever truly understand everything about the companies in which they've invested. That should not take away the responsibility management has to educate its investors on how all of the company's metrics are calculated,  not just those that paint a prettier picture.

Investors also have a responsibility to educate themselves on the performance standards that really matters in various industries. There's more to certain companies than just gaudy revenue and earnings-per-share growth numbers. Along those lines, if these numbers are said to have "missed estimates" (that gets thrown out a lot), it doesn't mean it was an awful quarter.

This is where executives who take the time to educate investors on the issues that formulate their decisions get rewarded. Having set clear expectations and measurable outcomes, investors in these companies rarely selloff the stock after one or even two bad quarters.

Essentially, from the clear communication that has taken place, investors are easy to appreciate that management's long-term plan can remain intact - regardless of whether estimates were "missed." And this brings us to another form a communication called "guidance" or how the company forecasts its performance.

While the Street seems always ready to either reward or punish companies for having "missed," investors should realize that these predictions -- even those from the company's management -- are only best or worst case scenarios. Let's not forget that there are tons of moving parts that go into these statements. We should hold management accountable for their words but recognize that they're not fortune tellers.

To that end, investors shouldn't discount how foreign economies can sway a company's outlook from one quarter to the next. I don't think CEOs are able to predict the exact date of when a government shutdown will occur and when it will reopen. And device giants such as Apple (AAPL), which is often criticized for its supply chain, can't often control parts availability. Not to mention the constants PR gaffes that exists at its biggest supplier FOXCONN (2354.TW).

Suffice it to say, words do matter in the world of investing. But investors shouldn't get complacent about educating themselves about what's really importing in investing. It starts with demanding clear disclosures from the company's management. Investors should always thirst for better understanding of the metrics that drives their industry. This is the only way to profit off of, instead of succumb to, greed and fear.

At the time of publication, the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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