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| Illutration created and copyright by Drake Kim |
Which choice is better? Should you chase stocks that are already soaring, or should you search for undervalued opportunities? This dilemma, faced by every investor at some point, is not just a matter of numbers. It is a philosophy of money, a study of psychology, and at times, a game of fate.
Where Does Money Flow?
In the early 1960s, IBM was dominating the U.S. market with an unstoppable upward trend. Investors who foresaw the rise of the computer era rushed to buy its stock, making IBM the king of the market. Meanwhile, in the early 1970s, Wall Street investor Benjamin Graham took a different approach. He sought out 'out-of-favor' undervalued companies rather than glamorous stocks. His disciple, Warren Buffett, also amassed wealth by purchasing undervalued stocks in his early years.
However, the notion that "cheap stocks will become expensive" does not always hold true. When the dot-com bubble burst in the 1990s, many investors witnessed IT companies collapse overnight. Companies like AOL and Yahoo were at the forefront of innovation, yet overblown expectations and inflated valuations ultimately led to their downfall.
So, let’s revisit the question: Should you invest in rising stocks or cheap stocks?
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| Illutration created and copyright by Drake Kim |
The Essence of Investing: It’s About Value, Not Price
Famed investor Howard Marks once said, "The greatest risk is when it is least apparent, and the least risk is when everyone is afraid."
This is the trap of rising stocks. When the masses flock to a stock, chances are it has already exceeded its intrinsic value. Conversely, an undervalued stock is not necessarily a great opportunity. If the reason for its low price is not clear, it may just be a "cheap stock" without real potential.
In the 1950s, as Japan began rebuilding its economy after World War II, Honda and Toyota set their sights on conquering the U.S. market. American investors, fixated on Ford and GM, largely ignored these Japanese companies. However, a select few investors saw their potential despite their low valuations. Decades later, Honda and Toyota became global automotive leaders.
Ultimately, the key is not just finding cheap stocks but identifying undervalued stocks. Likewise, even stocks that have already risen can still be worth investing in if they have substantial growth potential.
Two Key Questions to Guide Your Investment Path
1. Look at the Business, Not Just the Stock Price
- When Facebook (now Meta) went public, many experts were skeptical. However, investors who understood the data-driven economy recognized the immense profitability of its advertising business.
- Before Tesla’s stock surged, many underestimated the electric vehicle market. Yet, Elon Musk’s vision and production innovation reshaped the industry.
2. Leverage Market Psychology to Your Advantage
- During the 2008 financial crisis, Apple and Amazon stocks plummeted. However, investors who recognized their solid business models made significant gains through low-priced purchases. These companies went on to achieve exponential growth post-crisis.
- When the European debt crisis hit, many investors avoided Eurozone stocks. Yet, some saw opportunities amid the chaos and secured high returns.
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| Illutration created and copyright by Drake Kim |
The Mindset of a Successful Investor
American financial expert Philip Fisher once said, "Great investors look beyond numbers to see people and ideas."
Investing is not merely a game of numbers. It requires understanding market trends, analyzing crowd psychology, and discerning the true value of a company. Sometimes, chasing a rising stock is the smart move, while other times, buying an undervalued stock is the better option.
One thing remains certain: the most important factor in investing is value, not just price.
If you are considering an investment, don’t just ask, "Is this stock expensive or cheap?" Instead, ask, "Where is this company heading?" If you can read the market’s direction, profits will naturally follow.
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