Low price isn’t a green light to buy. Low-quality, slow-growth stocks are dogs no matter how little you pay for them. On the other hand, the best-quality growth stocks can bark as well if you pay too much. By buying quality growth stocks at reasonable prices, you’re well on your way to investors’ nirvana—high returns with moderate risk. Sometimes, finding this magical combination takes time and patience. Simple really—as long as you have some discipline.
If you find a stock you really like but the price is simply too high, all you have to do is watch and wait. Chances are the price will come down. The stock market tends to go through cycles, from the irrational exuberance of the late 1990s, when people would pay hundreds of dollars for a share of stock in a company with no earnings whatsoever, to the irrational fear of the early 2000s, when investors kept their money in money market funds while quality growth companies were selling at almost bargain-basement prices.
Despite what you might have heard about the efficient market theory, which says that markets digest all the available information to appropriately price stocks, bonds, and other types of securities, the truth is that in the short term, the stock market overreacts, particularly to bad news. In fact, bad news for one company can drag the prices of its competitors down with it. When you follow a stock and are confident in its future, these quirky price drops become your buying opportunities.
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