Investing 101: Understand What, and Who, You're Buying

NEW YORK (TheStreet) -- Warren Buffett once said, "If a business does well, the stock eventually follows."

It sounds simple enough, right? Except, the term "well" as described by Mr. Buffett is highly subjective. I'm not one to ever argue with Buffett's brand of logic. But I do recall that Enron was considered to be "doing well" until, of course, it wasn't. Shortly thereafter, the collapse of other "well-performing" titans like WorldCom, Lehman Brothers and Washington Mutual became cautionary tales.

It's true that Enron and the rest were clearly not as "well" as they painted themselves to be. But investors also had role to play in their own misfortune.

In every sector and industry I follow, one thing remains constant: Company executives will exploit any opportunity to make their businesses appear better than it actually is. At the same time, if there's bad news, rest assured that news will be either be buried in SEC filings or spun in a way to mask its severity. This is assuming the news is disclosed at all.

Certain CEOs have become celebrities. The days of hearing from them four times a year on quarterly reports have been replaced by real-time revelations on Twitter (TWTR) from the like of Tesla (TSLA) superstar CEO Elon Musk or Marissa Mayer, the glamorous Yahoo! (YHOO) CEO, defending her decisions via her company's platforms.

Don't forget, it was Reed Hastings, Netflix's (NFLX) CEO, who, by posting on his personal Facebook (FB) page, forced the hands of the SEC to adopt social media as a legitimate outlet for corporate disclosures. A new part of a CEO's job description is managing the fear and greed that comes with investing in their companies.

Investors, especially those that are new to the game, should ignore the noise that is often spewed by the media and writers like me. In fact, in most cases, investors shouldn't believe anything that comes out of the mouths of publicly-traded companies. That is, of course, until you seek out the evidence for yourself.

Assume that every press release or public statement by a business leader may be propaganda. It's their job to whip up support about their company and keep investors motivated about the future of business. Marc Benioff, Salesforce.com's (CRM) CEO, does this as well as anyone.

Don't interpret this as a negative, however. CEOs like Fred Smith of FedEx (FDX) reliably downplays his company's performance. The Street loves the company despite Smith's perceived lack of flair. That's because unlike Enron, FedEx has always delivered the goods. Not to mention, its business is easy to understand and analysts know how the company makes money.

Investors should recognize the value here. BlackBerry (BBRY) shareholders, for instance, were often misled into thinking that things were never as bad as they really were. Ultimately, its management opted to no longer disclose certain information about device unit sales and the company's subscriptions service earlier this year.

I don't believe this lack of transparency should be tolerated. It doesn't serve the investors interests of the company in question, which has an obligation to conduct business with honesty and integrity. Here again, Buffett, who heads Berkshire Hathaway (BRK-A), comes to mind. Not only is Buffett famous for his annual open letter to shareholders, but he goes out of his way to provide intimate details to investors -- some of which are not often required by disclosure policies.

Communication is the most important aspect of investing. A clear message helps investors establish realistic expectations and demonstrates the degree to which management values their shareholders. Transparency helps present a business whose fundamentals are easy to understand. That's the only way to truly know how "well" a company is doing.

In part 2 of this article we will discuss the importance of company-specific metrics and how to separate them the non-accomplishments investors often hear during conference calls. We will also dive into why it's important for investors to establish her/his own company performance standards. And to not always fall in love or hate management-issued guidance.

At the time of publication, the author held no position in any of the stocks mentioned.

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

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