Value remains arguably the most popular approach for analyzing stocks,
and research suggests it’s the most important determinant of stock
performance. Stocks with low valuation ratios of all types tend to
outperform. However, in the investment world, “tend” is a big word, and by
no means implies any kind of certainty.
When studies conclude that stocks with low P/Es tend to deliver higher
returns than those with high P/Es, they generally combine data from
thousands of stocks and holding periods. When you look at a smaller sample
—say, one stock—the trend doesn’t always apply. Some stocks with high
valuations will perform quite well, and some stocks with low valuations will
underperform the market. This often occurs with stocks that trade at a
discount to their peers because of weakness somewhere else.
You can’t own every stock, and you won’t find all the winners. You also
can’t avoid all the stinkers. You just need to find enough winners to offset
your losers, and you can increase your success rate by looking at other
attributes besides value.
Importance of Valuation.
