Legendary hedge fund manager Ray Dalio put it best when he once suggested that one of the biggest mistakes we can make in the markets is “buying those things that have gone up thinking they’re better rather than more expensive.”
The stock market, the jewelry market, and whiskey markets are the few places in the economy where the pricier something is, the better it’s automatically assumed to be.
Even in those instances where the more expensive stock or bottle of bourbon is better, the real question should be, “Is the quality is so much better that it justifies the price I have to pay?”
When we look at a stock price, it’s just a number.
That number doesn’t mean anything until you compare that price to the value of the assets and cash flows of the company the price represents.
There is too high a price for everything, no matter how good it may be.
And with stocks trading at an average of 23.9 times earnings, this is something that every investor needs to realize if they’re looking to make money in the markets.
You can buy shares of the best companies in the world and still end up losing money as valuations drift farther away from reality.
The Parable of the Nifty Fifty
Back in the 1970s, we had the “Nifty Fifty” stocks.
These were the best stocks in the world and included companies like McDonald’s Corp. (NYSE:MCD), Xerox Holdings (NYSE:XRX), Avon Products Inc. (NYSE:AVP), and other great companies that had soared in price.
There was no official list, but investment firms Guaranty Trust and Kidder Peabody both published lists of these great one decision stocks that you could buy at any price and get rich as they grew.
Then came the crash of 1973 and 1974. The Nifty Fifty stocks began to fall, and they kept falling until a new bull market started in 1981.
Had you bought an equal dollar amount of either list in December of 1972 and held them, you didn’t break even until 2001.
These were (and many still are) the greatest companies in the world, but if you paid too high a price, you would have lost an enormous amount of money unless you had the patience to sit still for almost three decades.
You can imagine how difficult it would have been to see these companies grow and expand to become global giants, and you still had a loss in the stock because you paid too much.
If you had instead put the cash in boring Real Estate Investment Trusts at the end of 1972 and held that portfolio until 2001, every dollar would have multiplied by a factor of 30 as you earned a compounded return of 12.9% for all those years.
That sounds better to me than finally breaking even after 30 years, even if it is less exciting.
Ben Graham suggested that investors should shop for stock the way they do groceries and not like they do perfume (This was in a “Ladies Home Journal” article) – buy them when they’re on sale and avoid buying when they aren’t.
I doubt many of us at the grocery store would see rib-eye steaks on sale for 50% off, but choose to buy the pork chops just because the price was higher than it was last week.
So why would we buy stocks that way?
|He Went from Making $8,000 a Year to Being a Multi-Millionaire (Here’s How)|
Don’t Play Wall Street’s Game
Trading the hot growth stocks is playing Wall Street’s game of “Pass the Burning Match.”
Investors and traders pass the shares from hand to hand to another until the loser inevitably gets burned.
It’s equally inevitable that the loser is will be a retail trader.
We may not like it, but the truth is that Wall Street is much more focused on giving us the match, and they are much faster than we are at executing the trade.
It’s better for us to steer clear of the herd and not play their game.
As General Patton famously stated, “If everyone is thinking alike, then somebody isn’t thinking.”
Nowhere is this truer than in the stock market.
If everyone likes a sector or individual company, then where is the buying pressure going to come from to push it higher?
If everyone likes something on Wall Street, then it’s probably best to take a pass and start digging around in the stocks that no one likes at that moment, looking for an unpolished gem.
This is a big part of what I do for you here at Max Wealth, and for my readers at Heatseekers.
I’m constantly on the lookoout for quantitative ways for us to find those unpolished gems and hold them until Wall Street recognizes the value of the stock in relation to the value of the company and buys them out.
You can make a lot more money with the overlooked and unloved stocks than you ever will owning the shiny and incredibly popular stocks of the day.
That’s exactly what I’ve done over the course of my more than 30-year career in this industry, and I’ve been wildly successful doing it.
In the five years before I joined Money Map, my published recommendations averaged a 70% return – numbers that every billionaire and hedge fund manager would kill to see.
If you want a shot at returns that even the wealthiest people on the planet would envy, click here.
Have a great weekend,