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.
Just ask people who bought Cisco Systems Inc. (NasdaqGS:CSCO) in 2000 or Bank of America Corp. (NYSE:BAC) in 2006.
Those stocks still haven’t recovered to 70% of their peak valuations more than ten years later, and decade into a record-setting bull market.
This past weekend I was amazed by how many people I ran across that are now experts on foreign policy in the Middle East and what Tom Brady should do after losing a playoff game.
All over social media, people expressed their loud, strong opinions on both topics.
If we listen to them, we should either beg forgiveness form the Mullahs or nuke Tehran.
Or, depending on where the expert hailed, Tom should either retire already or run for President.
The scariest part is that none of these are expressed as opinions, but rather pre-ordained facts that, if not executed immediately and exactly as the newly-minted authorities suggest, will have disastrous consequences.
Of course, with all of this excitement in the news, the stock market pundits didn’t want to miss out on the fun.
They’ve been very visible in the past few days, and trying to make money off of their wild predictions could have its own disastrous consequences for your portfolio.
The good news is that with some common sense, and a little math we can filter the noise and find wildly profitable opportunities…