If you're thinking about investing in stocks, don't forget the truism, that it's not enough to "buy low", you also have to be able to "sell high."
Dean Baker:
Thomas Heath used his column to give readers some incredibly bad investment advice. The piece titled, "a first lesson on the stock market: don't run from a good sale," told readers that the recent dip in the market makes this a good time to buy stock. This makes no sense.
Whether or not it is a good time to buy stocks depends on the price of stock relative to the fundamentals of the market. This means current price to earnings ratios and the prospect for future earnings growth. Current price to earnings ratios, at well over 20 to 1 by most measures, are high by historic standards. Most economists are not projecting especially good profit growth in the years ahead, but a big tax cut may allow shareholders to keep a larger portion of their gains, which would make stock more valuable.
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The moral of this story is that if the price of an over-valued asset falls, it is less over-valued, but a drop in price does not mean that the asset is under-valued. An investment advice column should show a little clearer thinking on this issue.