It’s not easy for a virgin investor to drown out the all the investment-machine noise, especially when you’ve got HD “Squawk,” coming at you morning noon and night. And to make matters worse you might hear Jim Cramer or David Farber, later in the day, quoting Melissa Lee on a stocks market value when what they really meant was price, (which of course all fund managers, worth their salt, know is not the same thing,) and off you go confused again. But out of all the din one thing that stands out most is the importance of total return. In fact if investment were poker then the total return could be what you call a company’s tell.
The total return picture includes interest, capital gains, dividends and distribution to shareholders over a given time, up to ten years in some cases. A close evaluation of total return can also help you feel out weaknesses in a stock’s performance. For instance steady dividend usually indicates stability, but a sudden robust gain in dividend payouts could mean a change in management, something to be watched.(It’s usually better that new management reinvests in the company for the first few years, make profitable improvements, rather than roll out like a rock star.)
Getting back to David Farber though, bear in mind that total market value of outstanding shares, or “Market Capitalization,” is mainly for aesthetics. For fund managers it’s mostly convoluted geek-speak born from the simple math formula of price x shares outstanding. You might hear the term “market cap,” it’s the same thing fuzzied up to make you, the investor, feel cozier with it. Price on the other hand is a game changer.
In a down market an undervalued stock picked up early in the game could be a real wealth edifice for beginning investors. Point being mistakes like misquoting could result in a lost opportunity to its hearer. In other words educate yourself with the real workings in total return don’t just trust your ears.
Aggressive financial moves take place under the total return umbrella. To clarify think of it this way back in the middle of August 2011 you could have picked up shares in Ford motors for $9.99. That’s cheap for a large cap company like Ford. Under the total return picture you will see dividends are still pretty steady for a company thriving, but struggling in the economy. This is a clue that Ford was selling undervalued stocks to its investors to raise capital. Taken in the context of all the other factors, like the projected five year gain, it could have just been a strategic move to pump up support. Overall it could have been a tidy little wealth maker if you could hold onto it for ten years or more. (Provided of course their prophecy isn’t merely absurdity.) So as you can see “total return,” gives you a heavier feast for thought. Weighed against the “market capitalization,” picture total return is a far better predictor of risk and anomaly, and as all savvy investors should know wealth is always attracted to the best opportunity.