"This time is different," is widely accepted as the most dangerous phrase in investing. Author of the new book The Art of Value Investing, Whitney Tilson has a 3-word phrase that's done even more damage to investors this year: "I missed it."
"It's the phenomenon where you look at a stock that's doubled in the last year and you just say 'I missed it' and you don't do any further research," Tilson says, in the attached video.
Everyone wants to be the first to own an obscure company that becomes a mega-cap or boast about stepping in to buy the most recent market panic. But buying a market or stock that's been on a tear requires an investor to risk being "the greater fool." Studies show that overcoming the fear of losing money or looking bad is much stronger than the desire to seek reward.
Tilson says the most important part of good investing is the ability to understand how to value a company and recognizing when market inefficiency is creating opportunity. Once those skills are in place, what differentiates the good investors from the great is controlling emotion.
"Wipe your mind clean, don't look at the stock chart; just ask only one question: 'I have the opportunity to buy this stock today at this price, is that a highly attractive price relative to intrinsic value?'" If the answer is yes, Tilson says it's time to get long regardless of what the stock has done in prior months.
Applying the logic to today's market, Tilson makes the argument that margins remain strong and, in his opinion, the economy isn't facing impending doom. If you accept those things as true the stock market rally isn't just rational but in its relatively early stages.
Margins are high and unlikely to contract thanks in large part to the availability of inexpensive labor. The few companies who are hiring have typically have no shortage of applicants. Supply and demand being what they are, prices for labor, in this case costs for corporations, should remain strong.
That's a recipe for additional gains, regardless of the fact that stocks have tacked on 20% since last November.
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