When doing your holiday shopping, it’s easy to grab gift cards from Starbucks, Target and other big corporate chains.
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Investing in cheap stocks can seem fail-proof. And to be sure, the underlying logic is sound.
Early investors should seek out equities that are fundamentally undervalued, and others will follow as the strength of said equities becomes more apparent. Then the underlying equity rises in price concurrently with demand and investors benefit via price appreciation.
But the world doesn’t work in such easily identifiable patterns. If it — or at least, the investment world as a microcosm of the larger world — did, then Benjamin Graham would be all the rage on Wall Street. Further, many of the growth stocks that dominate our daily media headlines wouldn’t receive much investment interest, because these stocks are anything but “cheap”.
Which leads me to my next point, or rather a question: how can investors objectively define a subjective term like cheap? After