Barry Ritholtz
4. Day-to-day stock action is mostly noise: This is blasphemy to some people, but it's true. Markets eventually get pricing right, but the key to understanding this is the word "eventually." Over the shorter term, markets frequently under- or overprice a stock before settling into the right approximation of value. This process typically occurs over broad lengths of time. Unfortunately, that doesn't stop some rather suspect interpretations of what these short-term movements mean. I look at these tea readings as Rorschach tests, revealing more about the speaker than they do about the subject.
Case in point: the homebuilders. It seemed that every time there was even the slightest uptick in the group, some bozo would declare that the bottom of the real estate cycle was in. Indeed, every dead-cat bounce or short squeeze was trotted out as proof positive that the housing problem was over. Only it wasn't, and the homebuilders cratered some 70% off their highs. You don't need to be a technician to know this: The little squiggles on the chart mean a whole lot less than the big squiggles do. 5. P/E matters less than you think: One of the things I heard a lot this year was "I (dis)like this stock because it has a (high)low P/E
." News flash: P/E ratios alone tell you very little about a stock's future prospects.
If that sounds like blasphemy, please look at a few examples: Google, Apple and Mosaic(MOS Quote - Cramer on MOS - Stock Picks) all sported high P/Es at the beginning of the year. Their stocks have done splendidly. On the other hand, back in January, retailers, financials and homebuilders all had reasonably cheap P/Es. (How'd they do?)
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