Regular readers of my work will attest to the fact that I am
an avid proponent of valuation. So much so, that I cannot recall writing an
article where I didn’t discuss the importance of only investing in a stock when
it was fairly-valued, or better yet – undervalued. This obsession with
valuation inspired one reader to dub me as “Mr. Valuation.” Frankly, it is a
mantle that I covet proudly. I bring
this up for an important reason. Long-running bull markets like we’ve been in
since the end of the Great Recession are very difficult markets for
value-oriented investors to navigate.
The reasons are simple and straightforward. First, it is
very difficult to find attractively valued stocks when investor sentiment is
wildly optimistic. Rising stock prices lead to investor overconfidence which
often further leads to complacency. Consequently, valuations based on
fundamentals, even when they reach dangerous levels, are easily ignored.
Rationalizations overtake logic; therefore, bull markets can persist far beyond
reason.
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