Monday, June 20, 2016
Joel Greenblatt: Don't make this investing mistake
"Stocks are not pieces of paper that bounce around," he said. "As far as we're concerned, they're ownership shares of businesses that we value and then try to buy at a discount. So that's value investing. Figure out what a business is worth, and pay a lot less."
"When you're paying 100 or 1,000 times earnings, or buying something that's losing money, these are hope stocks," he said.
"It doesn't mean Tesla won't work out," Greenblatt said. But, "if you bought a bucket of Teslas, really bad strategy ... history would say pretty much the worst thing you could do."
He also says in the interview that most people should not attempt to be active investors as they are not qualified to properly value businesses and determine over/under valuation.
I agree with this and it is backed by empirical data. It took me years of trial and error and making all the rookie mistakes before I finally learned by educating myself as to how successful investors value stocks. You have to buy cheap. But just because something is cheap does not mean it is valuable.
Most stocks that are cheap are cheap for a reason. The prospects for their business suck. However with proper work and discernment it is possible to find the diamonds in the rough so to speak.
It takes education and work which is why most people should just stick to a passive investment plan.