I enjoyed The Little Book That Makes You Rich (about growth investing) so much that I picked up The Little Book Of Value Investing by Christopher H. Browne on my favorite style of investing. You guessed it (the name was a dead giveaway, wasn't it?). Value investing.
One of the first things that Browne does is clear up a common misconception of value investing. Sure famed value investor Warren Buffett is quoted as saying "My favorite time frame for holding a stock is forever" but value investing isn't about buying and holding forever. It is about buying when a stock is undervalued and selling when the stock is overvalued.
Could the stock never be overvalued? Could happen. Unfortunately you and I both know that it is likely to become overvalued at some point in time (some of us might have, in our youth, purchased overvalued stocks). REALLY overvalued. And if the stock I'm holding reached that point, I'm going to cash in my chips and sell (If I love the company, then I'll wait to buy it when it becomes undervalued again).
Having a stock I own become overvalued is a gift from the market gods. And to ignore that gift can cause real pain (when the price corrects as it always does).
Browne puts it this way…
"If the stock price of a mundane company declines, which it often does, you have the comfort of knowing that it is still worth more than you paid for it, and someday the price is likely to recover. If a stock is grossly overvalued and its stock price crashes, history shows that it is unlikely it will regain its former inflated value." This is, Browne calls it, a permanent loss.
Comments (1)
Personally, I don't like to hold a stock for very long -- why take losses when you can just sell and buy back at a lower price? I tend to be more of a short-term trader in that regard.
The "Little Books" have piqued my interest, and they've gotten great reviews online -- I think I'll check them out.
Posted by Marla | February 5, 2008 12:32 AM
Posted on February 5, 2008 00:32