The Overpriced Market: It's hard to find anything worth buying

1.  Stocks in the market had enjoyed a great rise to a year high and optimism abounded.
2.  In the festive atmosphere that surrounded a recent 300 points in three weeks, I was the most depressed person.
3.  I am always more depressed by an overpriced market in which many stocks are hitting new highs every day than by a beaten-down market in a recession.
4.  Recessions, I figure, will always end sooner or later.
5.  In a beaten-down market there are bargains everywhere you look.
6.  But in an overpriced market, it's hard to find anything worth buying.
7.  The devoted stockpicker is happier when the market drops 300 points than when it rises the same amount.
8.  Many of the larger stocks had risen in price to the point that they'd strayed far above their earning lines.  This was a bad sign.
9.  Stocks that are priced higher than their earnings lines have a regular habit of moving sideways (a.k.a. taking a breather) or falling in price until they are brought back to more reasonable valuations.
10.  A glance at these charts led me to suspect that the much-ballyhooed growth stocks this year would do nothing or go sideways in the next year, even in a good market.
11.  In a bad market, they could suffer 30% declines.  
12.  I was more worried about the growth stocks.
13.  There's no quicker way to tell if a large growth stock is overvalued, undervalued, or fairly priced than by looking at  a chart book.
14.  Buy shares when the stock price is at or below the earnings line, and not when the price line diverges into the danger zone, way above the earnings line.
15. The market overall had also reached very pricey levels relative to book value, earnings and other common measures, but many of the smaller stocks had not.
16.  Annual tax selling by disheartened investors at the end of the year drives the prices of smaller issues to pathetic lows.
17.  You could make a nice living buying stocks from the low list in November and December during the tax-selling period and then holding them through January, when the prices always seem to rebound.
18.  This January effect, is especially powerful with smaller companies., which over the last 60 years have risen 6.86% in price in that one month, while stocks in general have risen only 1.6%.
19.  Don't pick a new and different company just to give yourself another quote to look up.  You'll end up with too many stocks and you won't remember why you bought any of them.
20.  Getting involved with a manageable number of companies and confining your buying and selling to these is not a bad strategy.  
21.  Once you have bought a stock, presumably you have learned something about the industry and the company's place within it, how it behaves in recessions, what factors affect the earnings, etc.
22.  Inevitably, some gloomy scenario will cause a general retreat in the stock market, your old favourites will once again become bargains, and you can add to your investment.
23.  The more common practice of buying, selling, and forgetting a long string of companies is not likely to succeed.  Yet many investors continue to do this.
24.  They want to put their old stocks out of their minds, because an old stock evokes a painful memory.
25.  If they didn't lose money on it by selling too late, then they lost money on it by selling too soon.  Either way, it's something to forget.
26.  With a stock you once owned, especially one that's gone up since you sold it, it's human nature to avoid looking at the quote on the business page, the way you might sneak around the aisle to avoid meeting an old flame in a supermarket.
27.  I know people who read the stock tables with their fingers over their eyes, to protect themselves from the emotional shock of seeing that their sold stock has doubled since they sold it.
28.  People have to train themselves to overcome this phobia.
29.  I am forced to get involved with stocks I have owned before, because otherwise there'd be nothing left to buy.
30.  Along the way, I have also learned to think of investments not as disconnected events, but as continuing sagas, which need to be rechecked from time to time for new twists and turns in the plots.
31.  Unless a company goes bankrupt, the story is never over.
32.  A stock you might have owned 10 years ago, or 2 years ago, may be worth buying again.
33.  To keep up with the old favourites, I carry a notebook, in which I record important details from the quarterly and annual reports, plus the reasons that I bought or sold each stock the last time around.
34.  On the way to the office or at home late at night, I thumb through these notebooks, as other people thumb through love letters found in the attic.


Peter Lynch
Beating the Street