10. Value Investing: Behavioral Origins
In a fundamental sense, trying to beat the market is a zero sum game. The average performance of all portfolio managers can be no better than average. To look at it another way, there are two sides to every trade. One person is always wrong.
Value investing follows a formula: Invest in stocks that are undervalued or even cheap by several criteria, such as low P/E ratios, low price-to-cash-flow ratios, or low price-to-book ratios. These tend to be stocks with low growth rates in boring industries, small caps that get little attention, stocks with no glamour at all. In another words, the idea is to search for overlooked stocks, the ugly ducklings of the stock market. The value proposition—and proof—holds ...
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