There was a great article on Stockopedia this week by CEO Ed Croft asking, Can you beat the market reading stock market bulletin boards? This triggered an excellent debate with several commentators warning of being wrong footed by “story stocks” that generate frequent, high volume bulletin board discussion. I’m certainly not alone in the past of having been swept away by a great story and joining in some of those discussions. But it often ends in tears because something goes wrong with the story – for every one of these stories that comes good and meets expectations, there are many more that fail to deliver or even fall by the wayside altogether.

Nonetheless, I believe a company’s story is a big part of the overall investment case and I love to see how the tale unfolds. Financial information via published results provides us with hindsight – a lagging indicator that is like looking through a rear view mirror. Many investors will value an investment primarily based on a company’s published financials. But we are often told that the stock market is forward looking and this is all about the story; the company’s business model, product or service USPs, its defensive moat, its forward plan and what directors are doing to execute that plan. It is the story that provides us with foresight and a company that establishes a track record for accurately telling investors its story in advance will be rated highly by investors.

Where hindsight meets foresight, investors have insight. Nearly all of my best investments have been in companies where the results were accurately predicted by the storytellers – where management did what they said they were going to do and met or exceeded expectations. However, it is very rare for a pre-profit, “jam tomorrow” company to deliver its early stage promise without a glitch along the way. Something nearly always goes wrong. Unfortunately, my experience is that the most discussed bulletin board stocks tend to be this type of company.

The key is to find companies that are already profitable and where there is a compelling story around how those profits are going to grow. Even better if the management have already demonstrated a track record for delivering against expectations, if the valuation hasn’t run away with itself and if the company is not widely discussed on bulletin boards. But if it’s not discussed on bulletin boards how can you follow the story? There are several ways investors can do so:

– The outlook statements (past and current) in company results announcement
– Company announcements (both regulatory and non-regulatory)
– The company website, related company websites and increasingly, social media
– Broker coverage, especially the house broker (sadly, these are not always available to private investors)
– Attending the company AGM, meeting directors and keeping in touch with them throughout the year
– Contact with the house broker or PR firm
– Attending investor events to see company presentations and often to meet company directors
– Press coverage
– Broker forecasts via financial information sites

I love a stock with a good story and I love being part of the story as it is being told but…

– I am very cautious about companies with overly busy bulletin boards
– I am even more cautious about companies that are too early stage
– I like to see a track record of delivery against expectations

And remember, where hindsight meets foresight, investors have insight – it’s a sweet spot when you find it. The quest continues…