Earnings Rule the World

Most people think the stock market is a game of luck. It is not. It is a game of Earnings.

Earnings are the profit a company makes after it pays for all the things it bought and all the people it hired. It is the only real thing in a world of hype and fancy logos. If you know the Five Categories of Stocks (Cyclicals, Stalwarts, etc.), you know that earnings are the engines for all of them.

Peter Lynch, a man who saw more balance sheets than a librarian sees books, realized that over the long term, the stock price always follows the earnings. It is the core of The PEG Ratio. If the earnings go up, the price will go up. If the earnings go down, the price will go down. It is a simple law of physics, like gravity.

The Ghost and the Machine

The stock price is a ghost. It jumps around and makes scary noises. It reacts to news about interest rates, wars, and what the President had for lunch.

But the Earnings are the machine. They are the actual business doing its job. If the machine is working, the ghost will eventually follow it.

If you buy a stock because someone said it was going up, you are chasing a ghost. If you buy a stock because the earnings are growing at 20% a year and the P/E ratio is 15, you are buying a machine.

The Smartin Reality: META

Remember when everyone thought Meta was dead because of the Metaverse? The price crashed. The ghost was terrified.

• Smartin Roast: If we ran the Smartin App then, it would have told you that while the ghost was screaming, the earnings were still massive and the PEG ratio was ridiculously low. The machine was still working. The ghost eventually came back.

Believe in the earnings. Ignore the ghost.

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