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Last month Barron’s published an article by Brendan Conway named Value Investing goes Back to the Future. In the piece, Conway goes on to try to establish the premise that value investors have changed from using historical prices or backward-looking measures to more risky forward earnings or forward-looking measures.
What exactly is value investing? Value investors buy attractively priced stocks, but there are backward-looking measures, as well as forward-looking ones. Lately, the forward measures are winning, and that fact tells an interesting story about what’s driving investors.
When value investors start to use forward-looking measures, I immediately begin to think that investors have begun to use more risky predictions on future growth to value stocks and the market overall. Actions that price stocks/businesses based upon risky future predictions have a high degree of variation and are highly inaccurate. I’m hoping that value investors are not chasing stocks as prices have risen over the past 5 years since the Great Recession.
I’ve noticed that I have caught myself thinking about justifying the stock price of a few companies that I really like, but the price is a little too rich for my liking. I have an internal voice that tries and rationalize the current offering price as a good entry point, when in the past I would have not paid up for such a stock. I believe that investors are trying to find outlets for cash holdings, and end up incorrectly justifying current prices and move ahead with purchases of stock. This seems to be what Conway’s article is showing, investors are not as afraid of losing money or possible bankruptcy and instead using future earnings potential. This could end badly for investors if they inaccurately predict future earnings.
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