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Motley Fool Income Investor / II: How I invest with II


Subject:  Another Valuation Article Date:  8/28/2013  1:39 PM
Author:  gdett2 Number:  480 of 505

After talking about Efficient Market Hypothesis (EMH), David Van Knapp states:

If you believe EMH, there is no point in reading further, because the rest of this article is going to talk about favorable prices at which to purchase dividend growth stocks. If you believe EMH, any and every market price is a good price, because you cannot do better. If that is true, there is no such thing as an undervalued or overvalued stock, since prices are always correct.

Very good point. Valuations can make a difference in the gains a portfolio can make. That is what buying good businesses during pull-backs is all about as is sensing a change in a business/competition that allows it to make a big step forward in the future.

While obviously if a price is lower than it was last week, it is "better" (for a buyer) than it was last week, that does not mean that it is a good price in the sense of being lower than intrinsic value. I think this is the source of confusion between price and valuation. People see a price drop, and they think that makes a stock a good buy. "Buy on dips." But that's not necessarily true. The lowered price may still be above fair value.

The crux of the issue: Are all price drops good? I would say, "only if they are big enough."

David shows a chart of WEC from FASTGraphs. Chuck's data shows WEC to be on the high side despite having dropped recently. This was a reason I passed on the rec here in II.

At the bottom, David shows a graph of PM. While it is closing in on the orange line, I like to see it below as a signal to take a hard look at it. David does point out that graphing close to the orange line is one thing he looks for among others.

I do like Chuck Carnevale's FASTGraphs as a tool to get a quick feel on a company to make a decision about doing further research of not.

Full article:

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