I would say that--especially to the value crowd that sort of follows the Buffett/Munger philosophy--it's this mistaken notion that a low P/E stock can potentially outperform...Companies with low valuations on rule-of-thumb metrics like price-to-earnings, price-to-cash flow, price-to-book are often indicative, even in the small and micro-cap space, of broken businesses. They are value traps. They are poor competitive businesses run by management teams that are treating the company as a personal cash machine. They may essentially be a declining annuity that deserves to be valued at, say, 7 or 6 times earnings, 3 or 4 times cash flow. So this idea that low P/E stocks outperform over time, I know has been reinforced by research (Fama and French and others). I sort of view low multiples as an indicator, telling me that it's probably a chronically under-earning business on its capital base, indicative of a poor competitive position. That's the thesis that I start out with when I see that sort of valuation. It's not always the case, but it more often than not is reinforced...That's where the screeners really get led into poor performance; in the identification of these companies that frankly deserve to be cheap.................
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