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Jim O'Shaughnessy: Don't chase the 'story' stocks

Kevin Chupka
Executive Producer/Writer

Whether it was Alibaba’s IPO, the launch of the iPhone or the most recent FOMC meeting, most of the catalysts behind any kind of market move this side of midterm elections are in the rear view. Should you be afraid of the stagnation? Is now the perfect time for the unexpected correction everyone is expecting? That depends.

According to legendary investor Jim O’Shaughnessy it all hinges on what you gauge your fear with. Using Alibaba as a prime example he notes that ”in the United States some of our stocks are pretty richly valued.” If U.S. equities are your litmus test, sure, a little fear may not be unwarranted.

As with Alibaba O’Shaugnessy says, “generally speaking when we watch the history of IPO’s you’re much better off after a year or two looking at real numbers as opposed to the magical fairy dust that they lure the IPO investors with.”

He believes for all the chatter about Alibaba’s value equaling any odd number of American blue chip companies combined, the great tech giant from the far east won’t be worth so much a year from now and that should give investors pause.

That, however, does not mean today’s market is devoid of value. In a segment posted to Yahoo Finance yesterday O’Shaughnessy names companies like Travelers (TRV), Hewlett-Packard (HPQ), and Staples (SPLS) as prime examples.

“The problem right now,” he says is a “rush to indexing...If you’re indexing to the S&P 500 you’re buying the most expensive names in the market.” If however you take a contrarian view, step away from the big indexes and seek out “well valued financially strong companies you’re still OK. If on the other hand you’re buying the story stock du jour, which is generally one of the most richly valued, watch out below.”

But individual stocks are not the same as broader corrections prompting the investor fear referenced earlier. Borrowing from the cowbell happy Blue Oyster Cult O’Shaughnessy advises, “don’t fear the reaper. There’s been all sorts of corrections going back to 1926. The challenge of course is investor behavior. Everyone says ‘I’m gonna wait for the 10%,’ but then when it does a 10% correction they say ‘oh it’s probably gonna go down another 10%.’”

O’Shaughnessy’s one stop shop cure for such an environment? Automatic re-balancing of your portfolio. Make your allocation choices and keep them right there!

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