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The S&P 500 (^GSPC) has been hitting highs recently, with the 5,800 mark now clearly in sight.
Some investors are a little concerned about this, as the current index level suggests that the price-to-earnings ratio (P/E) is a little expensive on a historical basis.
“Seeing today’s P/E ratio of 24x makes me a little nervous,” Michaela Gallina said on a recent episode of Stocks in Translation (see video above, listen below) please).
Garena has a unique perspective on the market. She started her career on the buy side, moved to the sell side, and then jumped into the corporate finance industry. She currently serves as both CFO of consulting group Wave HQ and Vice President of Investor Relations for H&R Block (HRB). There, she transformed corporate communications and facilitated a 191% increase in stock prices compared to her short tenure in tax preparation. company.
Investors can easily get caught up in the hype surrounding high-growth unicorns, Galina said, warning against chasing moonshots.
“There’s a lot of hype about some unicorn companies that are experiencing incredible growth,” she observed, adding, “If you want to beat the market, you need to be on top of your game.”
Generally, that means focusing on companies that offer long-term stability and reliable performance, rather than chasing the latest trends or speculative opportunities. But pursuing value over growth is easier said than done.
Mr. Galina said that when there is a market frenzy (and there is usually any frenzy), investors look for stocks that may be cheap but have fundamental flaws, and they may not go anywhere. He pointed out that there is. Such stocks are called value traps.
Legendary investor Warren Buffett wrote in a letter to his partners in 1966: “Price is what you pay. Value is what you get.” A classic quote from Buffett and his partner Charlie Munger says, “It’s much better to buy a great company than to buy a great company at a fair price.” It’s a normal company for a cheap price. ”
February 6, 2024 at the H&R Block tax preparation office on Flatbush Avenue in the Prospect Heights neighborhood of Brooklyn, New York City. (Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)
And in a market where more than 80% of the world’s active equity funds underperform their benchmarks, Mr. Galina’s focus on value stocks becomes even more important. Stock picking has never been easy, but in today’s market with a bazooka of alternative and traditional media sources, it’s arguably harder than ever.
A comprehensive Morningstar study of more than 10 years of active managers’ stock-picking records found that only 44% of professional stock pickers outperformed their benchmarks. But more importantly, and dangerously, they struggled to size their positions effectively.
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The study found that the biggest challenge facing many active managers and individual do-it-yourself investors is not struggling to find more winners, but rather “finding winners in a way that leads to outperformance.” “It turns out that the problem lies in part in sizing,” writes Morningstar senior manager Jack Shannon.
“The foundations gained by active manager winners often cannot make up for what laggards lose. Of course, higher fees don’t help either,” Shannon said, adding that fund management still remains We mentioned relatively high fee structures (the historical norm was a 2% management fee and a 20% incentive fee, and many still charge them). )
For Mr. Galina, value lies in following the Buffett model and identifying companies with steady growth in earnings and cash flow, rather than looking for undervalued stocks. What she’s looking for is “predictable, stable, long-term, strong, stable earnings and cash flow.” These qualities provide a potential safeguard against the wild swings behind so many growth stories in today’s markets.
The reality is that many companies that look promising on the surface don’t hold up to scrutiny.
“If most investors looked behind the curtain, they would find that most companies are completely uninvestable,” Galina said, adding that another (but brought up a related issue.
Garena invests with a very long-term perspective and aims for stable profits with low volatility.
“We’re not flashy, but we’re consistent,” she said of H&R Block’s stock, which soared 191% in the three years she led corporate communications. To her, this is proof that stable and predictable companies are the real winners in the market, even if they don’t grab the headlines.
She connects that to her side hustle in horsemanship, saying, “Riding a 1,200-pound animal teaches you a lot about grit. In the ring, no one’s coming to help you. You just have to get through it. No.”
StockStory aims to help individual investors beat the market.
In Yahoo Finance’s podcast, “Stocks in Translation,” Yahoo Finance Editor Jared Blikre cuts through the market clutter, loud numbers, and hyperbole to provide important conversations and insights from across the investment landscape to help you make the right decisions. Provides the essential context needed to make decisions. your portfolio. Find more episodes on our video hub or watch on your favorite streaming service.
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