<<The trick in buying fashion is to know what will last and what will not. In stocks, in my opinion, that is something that is very difficult for even a sophisticated investor to know>> So true. IMO technology could be substituted for fashion in the above statement. For every Microsoft there's several Novell, Wordperfect, Wang type fallen angels and bunch's of promising wannabe's that never delivered on the promise. The share price is a forecast of future prosperity or decline. When that forecast discounts incredible prosperity...a multi-year period of hypergrowth as it does in many tech stocks today, it is suspect. When the forecast, if for a basically sound business that's hit a rough patch, is to decline or perform way below long term trendlines for a multi-year period, it is also suspect.
With the potential for profitable business models to be attacked from multiple directions via the net, it's necessary to look hard at both optimistic and pessimistic price/forecasts before taking short or long positions respectively.
Research by Dreman and others has shown that news/developments that support the prevailing concensus/trend have modest affect on share prices, but news/developments contrary to prevailing trend/concensus can produce dramatic price moves in the other direction. In other words bad news tends not to be as hurtful to beaten down value stocks, but can slaughter a high flier [Although not so much in a market emotionally predisposed to a cheery view--but this optimism isn't permanent] Conversely good news can really boost a beaten down stock, but offer little help to one where expectations are already sky-high. Given a mix of positive/negative news/developements [Not really predictable] low expectations stocks should outperform. Recent market inclinations haven't been as supportive of this view as longer term studies suggest, but market moods and fashions, like the fashion oriented businesses mentioned in the above quote, tend to be unpredictable and to shift unexpectedly.
bob |
