An Investing Mistake That Could Cost You
Bot investing, ETF, value investing, market timing, technical analysis etc. are all terms that have been trends for investors. Each has their own reward and risks. Bot investing is the latest for financial engineers. Value investing is a proven strategy when an investor looks for companies that are undervalued by looking at the P/E ratio and an assortment of other metrics. However when everyone starts using this as a strategy the price of a stock starts going up and the traditional value investor loses their edge when looking for those classic bargains.
The investment community has lately gone on a tilting spree. Rick Ferri, founder of Portfolio Solutions, warns that there’s “an awful lot of money going into a small group of securities.” And there’s evidence that the market has changed as a result: The stocks with the lowest price/earnings ratios are now only 15% cheaper than those with the highest P/Es. The value discount has been closer to 35% in the past.
A tilt is when you invest in a bunch of stocks but weigh it more towards those with low prices relative to earnings. The problem with this method is that everyone is doing it so you are no longer finding value stocks. Stocks that used to be part of the value are now priced too high. The worst strategy when value investing is trying to time the market for when a value play would be good. If you think a stock is a great value then you should have no hesitation to invest.
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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.