Monday, January 5, 2015

Are "Undervalued" Stocks Just Low-Quality, Low-Liquidity?

Compare and contrast. This from Alpha Vulture

The more independent bets you make the easier it becomes to discriminate between luck and skill. Unfortunately stocks are never totally uncorrelated, and I think you can make a decent case that my portfolio is mostly long low liquidity and short high liquidity. So perhaps I’am at risk of large losses in certain market conditions, and are the above average returns thus far just a fair compensation for this risk. I don’t think that that is true, but given the randomness and uncertainty inherent in investing it is not an easy statement to disprove (if possible at all).
And this from Young Money
Between the credit bubble and the subsequent central-bank pumping, cyclical, low-quality stocks have had an unprecedented run, and that's given investors a very warped and simplistic understanding of what constitutes value. They've been trained to think, "Just buy it if it looks cheap! Macroeconomic risks are impossible to predict and don't matter anyway, and even if they do the Fed will bail us out!" Many people who think they're buying undervalued stocks are really making a bet that low-quality stocks will continue to outperform.

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