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Share price: Earning is inflated and expenses are deflated.

November 6, 2014

There are 2 kinds of investors; professional and amateur. There are more amateur investors than professionals. The total money invested by the amateurs exceeds the total money invested by the professionals, although the amount invested by each amateur investor is much smaller than the amount invested by each professional. The amateurs usually make less money in a Bull market than the professionals and when the market is Bear usually lose more money. BLASH (Buy Low And Sell High) is my goal, a term I invented and use in my 2 books on investing for amateurs.  My job as an amateur investor who makes as much money as a professional investor is to help my co investors make money or at least not lose money to the professionals, which is usually the case.

Let’s look at Alibaba, the new heavy-set kid on the American block. I bought shares of BABA near IPO and I am making inflated dollars. I am not under the illusion that BABA’s first quarter’s earning after the IPO is really the reported 45 cents per share. It is more like 25 cents per share when you consider the unreported expenses for the quarter as true expenses, which they are! It is legal to inflate earnings by not including as expenses employee compensation, paying salary with stock options, inflating share price with buybacks that raise the value of existing shares (supply and demand). What it does, it sells extra shares by these artificial means in the short run untill the market catches the gimmick in the long run and prices go down. By then the professionals have already cashed in their profits and the amateurs are struck with low price shares they brought at the short-term high price. The fact that the analysts were fooled too by the first quarter estimates is no consolation to the amateur investors who were fascinated by P/E more than cash flow before they bought. The solution is what I did with BABA. I bought the shares for the long run because the short run has in it the hidden inflated price(HIP) on any new stock! It is not hip at all to buy high in the short run and sell low in the short run because companies play shenanigans with how they define their calculated defined expenses.

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