2022 has been a rough year for investors. At one point the S&P index fell as much as 20% while the NASDAQ fell as much as 30%. Even savvy analysts from large investment banks like Goldman Sachs found it difficult to gauge what direction the market is going and if the market has bottomed out. This signals that we are no longer in the free for all environment of 2021. Instead investors focus on fundamentals in order to maximize returns. As we approach the new year, here are 3 investing mistakes to avoid in 2023 to maximize your investment returns.
Ignoring The Cash Flow Statement
The cash flow statement provides investors with a detailed picture of the cash inflows and outflows of a business over a predefined period. As the U.S. uses an accrual accounting system, this statement gives the investor information they need to determine if the business can meet their short-term and long-term obligations.
The cash flow statement is divided into three activities: operating, investing and financing. The operating activities provide detail on cash flow generated after the company has paid for providing goods and/or services to its customers. Investing activities show how much the company makes from selling assets and how much the company is investing in new assets. Lastly, financing activities provides detail on cash flow from investing and debt financing activities. This section is particularly important to understand the company’s capital structure. Ideally, a company that has a profit and a positive cash flow is a good candidate to invest in. However, if the company has a negative cash flow it may be prudent for the investor to analyze where the money is being spent before investing in that company.
Forgetting The Disclosures
One of the top investing mistakes to avoid in 2023 is forgetting to read the financial statement disclosures. Disclosure refers to additional information made available to the public by the company. This information aids investors and others to make informed decisions about investing. Disclosures ensure transparency in that they usually include information that either cannot be found in or easily discerned from the general financial statements. For example, a company may change its accounting method and this results in an increase in profits. One could easily interpret the increase in profits as either the company’s revenue increased or the company increased its efficiency. To prevent this kind of misunderstanding, the company is required to disclose in their reporting what the accounting change is, why the change is appropriate and how the change affected the financial statements.
Focusing On Only Historical Data
There is a lot of information out there that investors can use in their analysis to determine which companies to invest in. What is sometimes missing from this activity is forecasting. The good thing is that for many of the companies traded on the stock exchanges, there are professionals tasked with making this prediction for you. Using this information can lead investors to make more informed decisions on where best to place their money in 2023.
Interest in learning more about investing and other investing mistakes to avoid in 2023? Check out these other blogs [6 Common Investment Mistakes To Avoid] and [What They Don’t Tell Beginner Investors].
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