Hi, straight to it.
The title of this blog is very interesting as, it is something that has been an interesting topic in many books regarding investing.
Are bad companies the best investments?
Yes, simply put.
Bad companies tend to be mis priced by the market and this is common, as many of these companies are usually bargain issues. Winning in the stock market is about finding companies which will deliver the best return or be of the best value to purchase at the given time. You have to focus on one or the other.
Why are good companies bad stocks?
Well, they are typically purchased at a premium price, this tends to drastically decrease your long term returns- Buffett made his fortune by purchasing cheap, low P/E ratio, low P/B ratio- dirty stocks. The ones which were heavily under priced by the market, success leaves clues. Buying cheap issues and having the stomach to take the risk and withstand volatility is the key to attaining success in stocks.
Low P/E and low P/B stocks do out perform higher P/E and P/B securities in the long run, by a fair margin too.
How do you find these cheap dirty stocks?
It’s very simple and yet over complicated by many for whatever reason, you can easily find these issues as these stocks are usually hot businesses which have in turn gone cold, the heat is off of them- value investors hunt for these businesses. The are over looked by most analysts and they are the stocks which tend to lead to the best results when investing.
Why do cheap companies provide above average results?
It’s all in the price and the value in which the stock is selling at, if the stock is selling at 1/2 or 1/3 of it’s true worth, the business is likely to return 15%+ on it’s investment. Simply because the issue is selling at such a low price! The price of the company is essential and you have to be able to take risk in this business, taking risk leads to above average results.
For further education on the stock market, check out:
Thank you for reading and have a fantastic week ahead.