As you know by now, my practice is to try and buy all the valuable equity I can get for the dollar when I buy stock. I’m keenly interested in what the company says about its future in terms of sales and earnings because the future operating performance is what will dictate the stock price performance after I buy.

Even knowing how important future performance is, I don’t want to heavily rely on the future to protect my investment today. So, what has the company already “banked?” The balance sheet exposes what the company has stored up to date in stock valuation (or equity). There needs to be enough already “banked” to ease my concerns about how the future performance plays out.

If I buy enough equity to help protect my investment dollars and the subject company appears to have a bright future in terms of growth potential, I’ve made the best choice I can make to minimize risk and maximize return.

Yet, a risk will always remain, even after doing proper analysis and all the requisite homework. Management has to “execute” on its business strategy. Management can be overly cautious and fall behind the competition and they can be overly aggressive and see the competition overcome management’s failure to handle the growth (biting off more than can be chewed).

As I wrote in my book, Choose Stocks Wisely, it is important to read about management before investing in an individual company. See what kind of background the manager has, where he/she attended college, previous positions held, etc. Management must execute for our investment to pay off well. Even after we have justified an investment by the numbers, it remains that management must execute.