Every time you speak with a stockbroker
about any equity he always says, “I will send you
a prospectus”. My question to you is do you know
how to read it? Probably not.
     I am not being critical of you. That’s just
the way Wall Street wants it. Yes, everything
the company has to tell is told in that
document provided they told the truth, but it
is presented in such a way that it is almost
meaningless.  The person who thinks he
understands it is the lawyer in his Dilbert
cubicle at the Securities and Exchange
Commission.
    Reading a prospectus from the most successful
company in the country and one that is on the
verge of bankruptcy is almost the same. The
facts are laid out and unless the reader is a
professional accountant it will be difficult to
determine any difference.
 Much of the information in any prospectus
is old, 6 months to a year because of the
statistics. What you want to know is not where
the company is now, but where will it be 6
months from now. No prospectus will tell that.
Enron proved it.
     There will be an evaluation of the
management’s performance record, where they
worked before and how each one did. One thing
never addressed is whether this mutual fund
manager has ever been through a major bear
market. Most haven’t. This is extremely
important.
    There will be an expense ratio if it is a
mutual fund. Now many funds are charging
redemptions fees if you sell out before a
certain period of time. That’s a rip off.
     A stock company will tell you about their
product and how it is superior to their
competition. (You don’t think they are going to
tell you they are average, do you?) Mutual
funds talk about sectors in which they
specialize and especially how they have done
over the past 3, 5 and 10 years. You didn’t buy
this 3, 5, or 10 years ago so you want to know
what they are going to do in the next 3, 5 and
10 years.
     The SEC requires that all prospectuses add
a sentence that says, “Past performance is no
guarantee of future results” or something
similar. In other words you pays your money and
takes your chances. There are no guarantees in
stock market investing and this document is
most likely not going to be much help.
     A prospectus does tell you all the facts
that are required by the SEC and that is what
Dilbert looks for. He has no way of knowing if
these are correct. They usually are and all
footnotes are very important. It is the old
story of ‘they give it to you in the big print
and take it away in the small print’.
     If you are going to rely on a prospectus
to buy any equity the best person to read it is a
securities attorney. Don’t rely on a broker as
he probably doesn’t know much more than
you do.
        Al Thomas' book, "If It Doesn't Go Up, Don't
Buy It!" has helped thousands of people make
money and keep their profits with his simple
2-step method. Read the first chapter at
http://www.mutualfundmagic.com and discover why
he's the man that Wall Street does not want you
to know. Copyright 2006 All rights reserved.