Today I introduce the most important tool available in all the world to evaluate a stock -- the Believe-O-Meter.
Now, a Believe-O-Meter is not a specialized piece of equipment, it is something that we all are born with. Anatomically speaking, it's a part of the brain that is probably located next to the section that likes reading the funny papers. Over time, it gets calibrated from our experiences, and generally it comes to work pretty well for most people.
Some have defective Believe-O-Meters, though -- like those who believe that the Moon landing was faked, or that Hillary Clinton raised an alien baby in the White House. Sometimes our calibration is askew, and the meter will get a low reading when the truth actually occurs, or a high reading on something that is not quite right. However, for day-to-day uses, most of our Believe-O-Meters are pretty good, so we need to pay attention to them.
I'm not a biologist, but I once took a course in zoology. Therefore, I can comment on the evolutionary development of this important part of our anatomy. The reason we have Believe-O-Meters at all is to help us evaluate situations when not all of the information is readily available, to determine whether something is true.
Believe-O-Meters were highly necessary in "cavemen" days, when our could-have-been ancestor, Zog, suggested to our actual ancestor, "Hey, let's go get us a mammoth with these small rocks in my hand. One rock will bring it right down." Zog unfortunately was not gifted with a Believe-O-Meter, and his line ended in a crushing blow that afternoon. Your ancestor, on the other hand, was equipped with a fairly good Believe-O-Meter, and he declined to attack the mammoth with the excuse that he really had to gather some berries.
Later that day your ancestor commemorated the ill-fated expedition on the cave wall with paints he made from the berries. Better yet, he got Zog's girlfriend after the unfortunate Mammoth Hunting Incident, and he passed the Believe-O-Meter through the gene pool to you.
Of course, no one is asking you to go mammoth hunting, but there are times when you use this device in modern society without thinking about it. A good example is when you get an email promising you the ability to make millions on the Web. You don't know anything about the sender or the business proposition to rationally evaluate it. So, you run it through your Believe-O-Meter and -- yes -- it gets a very low reading indeed. So, without any further waste of time, the offending email is deleted. The sender, of course, is hoping to reach someone with a defective Believe-O-Meter, or a person who refuses to use his or her meter.
In stock evaluation, your Believe-O-Meter can help you cut through all the conflicting reports and the hype. In the end, your Believe-O-Meter should tend to give low readings on companies that you should not invest in. For example, a few years back there was a stock called Comparator Systems (Nasdaq: IDID) that supposedly had a device to ID people from their fingerprints. It got hyped, the stock jumped up, and soon trading was halted. People lost a lot of money. From one news report I read (after the fact), a reporter visiting the offices believed the company's business seemed to be sticking wires in the back of old computers. That reporter's Believe-O-Meter was kicking in with low readings. From all the hype, our meters should have been humming low, too.
The Believe-O-Meter works the other way, too. Sometimes panic sets in and stocks drop like a rock for no reason. I've seen Intel (Nasdaq: INTC) do this several times over the years I've held that stock. In each case, I refrained from selling because my Believe-O-Meter gave a low reading on the negative press.
Take a look at some of the stocks in the Rule Breaker Portfolio. America Online (NYSE: AOL) was attacked regularly by the media from 1994 to 1997, but the Rule Breaker's Believe-O-Meter kept it believing in AOL, to large gains. Me, I heard a Dan (ugh!) Dorfman report on CNBC saying that AOL was overvalued and I ignored my Believe-O-Meter (what a mistake!). We don't hear about Dan anymore, and AOL jumped a skillion percent. My Believe-O-Meter keeps saying, "I told you so, George." (I unfortunately have the talking version, with extra memory.)
I'm not advocating that you skip looking closely at a company's finances or its business, of course -- that's part of due diligence when you buy a stock. However, the bit of extra common sense that the Believe-O-Meter provides you is one of the most important evaluation tools you have, so don't be afraid to use it. If you don't believe me, use your own Believe-O-Meter on what I'm saying to you right now. It will probably give you readings off the chart.
To discuss this column and the Believe-O-Meter, visit us on the Drip Basics board.