“Who are you to know if a stock is cheap? Have you ever lived through a downturn?”
When I was a young Wall Street analyst visiting institutional investors in Boston. He asked me what I thought about a particular tech stock. I walked him through my forecast for the company and said the stock was a buy. “Why?” he asked. I said, “Because the stock is cheap.”
Big mistake. He launched into a 10-minute tirade, screaming, “Who are you to know if a stock is cheap? Have you ever lived through a downturn?” He even told me my tie was too expensive before he threw me out of his office.
Ah, the service business. But I never again said a stock was cheap and instead focused on fundamentals, emerging trends, expectations and market sentiment.
Cheap stocks can always get cheaper. Companies such as Peloton, Carvana and Robinhood are down 80% to 95% from their peaks. Buy the dip, right? Be careful—the biggest mistake is looking backward, not forward.
My sense is there is more ugly stuff coming.
Eighty percent of hedge funds are down and dumping their losers. Short-term interest rates are heading to 5% or higher, which means stocks will trade at a lower price-earnings multiple.
Even worse, quarterly earnings misses are starting, and, like cockroaches, you never see only one.
Andy Kessler WSJ 16 October 2022
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