Maxims can be the kiss of death in investing. "Always buy low P/E stocks." "Always look for low price-to-book." Holding fast to these supposedly bulletproof investment strategies -- good as they sound -- could cost you, says Fool contributor Tim Beyers in the following video.
The problem is context. A low price-to-earnings multiple is helpful only in those instances where earnings are growing at a faster pace than the low multiple implies. Look at for-profit educator Apollo Group (APOL), which has suffered a single-digit P/E ratio throughout the past year. Revenue and earnings fell consistently over the same period, and the stock is off 50%.
Low price-to-book stocks suffer from a similar problem. Who cares if the stock sells for a discount to its assets if the company can't earn a good return on said assets? United States Cellular (USM -1.63%) has seen its returns on assets and equity decline steadily since 2011. Thus, despite a history of trading near or below book value, the stock is down 22% since the beginning of last year.
Investment strategies are just that: strategies. Recognize that every company is different. Analyze the underlying strengths and weaknesses before you buy. Because the more you understand about what drives a business to grow, the more likely it is you'll pay a fair price to own a piece of it, Tim says.
Do you agree? Please watch the video to get Tim's full take, and then leave a comment to let us know which investment strategies have worked best for you.
