I never buy a stock with the hope that the price will go up. Instead I only invest in companies whose business I believe can grow at a rate high enough to reward me appropriately for the risk I assume. Once I find a company whose growth I like then it’s only a matter of valuation. I refuse to overpay for a growing business no matter how much I like the company. The discipline of valuation protects me from getting caught up in the hype and hysteria that often accompanies a good story.
You might logically ask why would I talk about overvaluation in the depths of one of the most severe bear markets in history? My answer is straightforward: It was excessive valuation that got us into this pickle in the first place. Unfortunately this critical factor is almost totally ignored. As we all know, if we don’t learn the lessons from the past, we are doomed to repeat them. As it applies to investing in stocks, a lesson learned is a dollar earned. Today’s FRAT™ Videx™ looks at how overvaluation destroyed investor returns on Coca-Cola, one of our great stalwart companies!
FRAT™ VidEx™ (click to open in full screen)
There has been a lot of talk about the past performance of the stock market lately. Unfortunately, there has been very little talk about the overvaluation that was at the root of its poor performance. Measuring past performance without simultaneously measuring valuation is a job half done. Much worse, however, is relying on past performance as a guide to future performance while ignoring valuation. In order to intelligently forecast future return, valuation must be a major consideration. The bear market has wrung out a lot of excess valuation. Wouldn’t that indicate a good time to be buying? I think so.
[...] http://www.themarketsupchuck.com/blogs/?p=252 June 13th, 2009 | Tags: Earnings Growth, KO, the wrong time to buy a stock | Category: Earnings Growth, Fundamentals, Valuation | Leave a comment [...]