Wall Street glorifies companies that exceed quarterly estimates by claiming that the long run includes a lot of short-term. But beating earnings estimates for a few consecutive quarters is not necessarily synonymous with long-term excellence. This assumes that significant changes in the business are visible in the reported figures.

That's probably what General Electric

GE, -0.70%

leaders rationalized their action by destroying the "gap" and corporate culture respected by the protecting shareholder. Their short-term thinking was aimed at "beating profits" on a quarterly basis, thus ensuring seemingly endless upgrades for analysts. With the exception of the market, GE's short-term success has resulted in invisible damage to its gap, balance sheet and corporate culture.

Conversely, consider Apple

AAPL, + 1.70%

reporting what analysts saw as "disappointing" numbers for eight consecutive quarters (three lives on Wall Street) until 2007. During this period, Apple spends every ounce of its resources on research and development and offers the iPhone. It can not hire the right engineers fast enough and therefore has to rely on engineers who were working on the Macintosh (then it's Apple's black bread), which delays by a few quarters the introduction of new computers (which has occurred). Did these short-term negative results subtract from the value of the company or did they play a determining role in adding billions of dollars of revenue to Apple?

The gaps and quarterly beats only show what is seen, but real investors are able to see the invisible.

With the luxury of hindsight, I have chosen two examples, GE and Apple, that seem to prove that the revenue losses are excellent and that the beats are bad – but they are neither one nor the other. ;other. They are part of the vocabulary of the mid-term reality TV show on professional television – to which I choose not to participate. Facebook

FB, + 1.19%

for example, was recently accused of resorting to the psychology of casino games to urge their users to return regularly to see if their publications or family photos were "appreciated". Quarterly "beats" and "failures" are not very different; they add the excitement of casinos to investments and turn unsuspecting investors into players.

This does not mean that an investor should completely ignore what is happening in the short term, but quarterly results should always be examined in the right context, the long-term context.

Long-term thinking should be deeply embedded in your stock analysis. A discounted cash flow analysis (DCF) model requires you to value a company as you evaluate a private company, which brings cash flow of about ten years into the present.

But DCF analysis, while well-founded, is a crude model that is most useful at the extreme values ​​of a company's valuation, when a company is extremely overvalued or undervalued. That's why it makes sense to estimate the value of a business based on its multiples of profits. In my process, I observe the expected benefits of a business in three to five years, then discount them (converted into current dollars). That's the key: looking at the benefits of doing business so far, you're choking the noise of quarterly results – the hysteria "what have you done for me recently?" – and focusing on the future.

So, how to invest in this overvalued market? Our strategy is stated in this article rather long.

Vitaliy Katsenelson is Investment Director at Investment Management Associates in Denver, Colorado. His company holds no position in any of the titles mentioned. He is the author of "Active Value Investing" and "The Little Book of Sideways Markets".