April 13, 2011 - One of the most often heard comments in investing: "I sure hope my stock comes back." This is not a winning position to take. In fact, it almost guarantees losses. I hate to say it, but there is no hope in investing, only facts. And the facts at times can be very hard to take.

Some companie survive several quarters of losses, especially ones that have been profitable in the past and need a few quarters to cut costs and offer new products or services. It's the ones that keep doing the same thing, such as research on a cure for a disease, and not showing any progress that have to be carefully scrutinized. Successful companies will only throw a limited amount of money at a project before going in another direction, to preserve precious capital. To continually do the same thing over and over with the same results is the definition of insanity.

Another fact: accounting misdeeds, executed with pre-meditation are killers. In other words, if management is cooking the books, look out below. Two outstanding examples: Enron and MCI. While it's very difficult for investors to determine deceit in accounting, once it is known, getting out is the best strategy. Usually accounting problems are like cockroaches: what you see is only the beginning of a much deeper issue.

No or slow growth is a recipe for a lower stock price. If a company is standing still, i.e., revenues are flat for several quarters, it usually means a product or service the company offers has reached its audience and future growth depends on new ideas. It also means management should have a dedicated Research and Development department that is very busy. Look for how much is spent for R&D in a company. If it's very little or none, where will new products come from? This is especially vital for drug and technology companies where change happens quickly. A company not growing is dying. Dying companies don't have stock prices that go up.

Another fact: Leadership counts. If the CEO of a company is suspect, don't invest. You can learn about a CEO's background in the SEC filings. It will give the resume of top management. If there's any scandal associated with the CEO, be very careful. He/She sets the tone for the whole company, hires people in his/her likeness, and makes most of the critical decisions.

Two great examples of leadership are the heads of Fastenal and Apple, Bob Kierlin and Steve Jobs. Mr. Kierlin makes $120,000 a year (and has for more than 10 years even though the board has authorized increases) but runs a company that generates $2.26 billion in sales. He owns 12% of the company, worth about $250 million. His reward comes from the stock's appreciation. Mr. Jobs does him one better: he takes only $1 a year in cash, the rest in stock. He's done that for the last 10 years. His wealth comes from the same place as investors' in Apple stock.

Here's the great thing about facing facts: they allow you to move on. Every time I've finally pulled the trigger, taken a loss on a stock, I've immediately looked for the next one. As soon as I've re-invested, I forget about the old loser and focus my attention on the new, promising stock. I always feel better, knowing that I've given up hope and started again with facts.

There are many good investing strategies: high return on equity, sound dividends, low valuations in P/E (price to earnings ratio) and PSR (price to sales ratio), top down, bottom up, fundamental, technical, to name only a few of the more well known ones. Hope is not among them.

- Ted Allrich