The science of behavioral economics delves into the ways
our brains trick us into doing
stupid, irrational thingswith our money. Among the many
odd patterns it's observed: the bandwagon effect, which
suggests that we often do or think things solely because many
other people do so, too. Unfortunately, by sticking with the
herd -- especially in the stock market -- we often
set ourselves up to fail.
Bubbles and trouble
Think back to the Internet stock bubble of the late
'90s.
Yahoo! (Nasdaq: YHOO) shares traded at a
split-adjusted $24 at the end of November 1998, then more
than doubled in just a year to $53 by the end of November
1999.
Just one monthlater, they closed at $108. Do you
think that the company had somehow shown itself to be twice
as valuable from one year to the next, and then from one
month to the next?
Nope. People saw the price rise, and the faster it rose,
the more they irrationally wanted to jump onto the bandwagon.
By the way, I don't exclude myself here -- I was just as
stupid and greedy as many other investors, which cost me the
better part of what could have been
mammoth
gains.
Mary, Mary, quite contrary
Warren Buffett has offered this sage advice: "Be greedy
when others are fearfuland fearful when others are
greedy." In other words, he's urging us not to hop on the
bandwagon.
Indeed, the entire strategy of value investing is based on
not following the crowd. Value investors seek
companies that are trading for considerably less than they're
worth. They owe their bargain prices to a general lack of
respect from the market. The bandwagon is elsewhere.
If you'd like to look for value-laden stocks, a
Motley Fool CAPSscreen might be a great place to start.
Here are just a few of the companies we unearthed in a search
for solid returns on equity (ROE), little debt, and
relatively low P/E ratios:
Company
CAPS
stars(out of 5)
ROE
Long-Term Debt-to-Equity
P/E
United Technologies (NYSE: UTX)
****
22%
0.47
17
Precision Castparts (NYSE: PCP)
*****
17%
0.04
17
Jacobs Engineering (NYSE: JEC)
*****
15%
0
13
Ensco (NYSE: ESV) Continued... |