What Makes Stock-Picking Doubly Difficult?

A crystal ball isn't enough

If a company’s profits are rising, should its stock price also rise?

In general, that is the case. At a mathematical level, stock prices represent the present value of all of the future cash flows that a company is expected to generate. So rising profits should translate to a rising stock price.

But that isn’t always the case, and that’s because expectations also play a part in stock prices. A company might be growing, but if it isn’t growing as fast as investors expect it to, then its share price could fall, even as its sales and profits grow.

That’s the danger with highflying stocks. Even when sales and profits might be rising quickly, stock prices can tumble when profits fall short of expectations.

This is among the reasons I don’t recommend trying to pick individual stocks. Not only does the company need to do well. It also needs to exceed expectations.