It is a commonly held misconception that all value investors do is sort stocks by P/E (or P/B) and invest in those with low P/E (P/B). But considering low P/E (P/B) stocks is only part of the value investing process. This is because, on average, about 39% of all low P/E (P/B) stocks have a negative return for the 12 months following their selection [1]. How do value investors separate the good low P/E (P/B) stocks from the bad ones? They do so by valuing each low P/E (P/B) stock to determine its intrinsic value and only invest in the stocks that afford them a satisfactory “margin of safety” - these are the good low P/E (P/B) stocks.
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