Investing 101

Almost every day you can pick up the Wall Street Journal and read a salacious headline like, “GE loses $2.32 a share!” But then you look up the stock price and it’s up 4%. How can that be?

Journalists aren’t paid to be accurate – they are paid under an ethos to sell newspapers or advertising on blogs. One would think that inaccurate or irrelevant reporting would be a problem over time but that has not proven to be the case.

What happened in the GE case? Well, some journalist missed accounting class and/ or didn’t bother to read the GE press release and filings in full. If they had, they would have realized that the company had purchased a bunch of technology patents for optimizing insurance statistics and/or jet engine air flow and they chose to write the value of those purchases to zero this quarter. The write down was a kind of accounting fiction – it had no impact on real cash earnings… it was simply to right size some basic data on how they were valuing assets. No big deal.

But it caused a technical reporting blip to show a big loss and luckily Wall Street investors were able to look through the journalist’s mistakes/flaws/lack of understanding and get the key facts right – that the cash earnings grew and dividend would likely be increased so the stock went up…

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