Message Font: Serif | Sans-Serif
No. of Recommendations: 1
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:

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.