Non Olet

In order for a story stock to become a success, three elements have to fall into place:

The story must be a surprise. If many investors already know about it, the story’s impact will already be factored into the stock’s price.

The story must be meaningful. In other words, it must be significant in terms of the company’s earnings. For example, a new version of a product that represents less than 1% of a company’s profits isn’t going to have much of an effect on the company’s overall performance. On the other hand, the announcement by a semiconductor manufacturer that it is building a new chip-fabrication plant costing more than $5 billion—equivalent to two years’ profits—would be much more significant.

The story must come true, at least eventually. Many dot-com and biotech stock stories went astray because the stories never turned into actual cash flows. Professor Stewart Myers of MIT once noted that top venture capitalists don’t succeed by picking successful companies, but by ruthlessly weeding out companies in their portfolios that don’t meet specified development plans and target dates (a characteristic of stories that don’t come true).