Maxims can be the kiss of death in investing. "Always buy low P/E stocks." "Always look for low price-to-book." Holding fast to these supposedly bulletproof investment strategies -- good as they sound -- could cost you, says Fool contributor Tim Beyers in the following video.
The problem is context. A low price-to-earnings multiple is helpful only in those instances where earnings are growing at a faster pace than the low multiple implies. Look at for-profit educator Apollo Group , which has suffered a single-digit P/E ratio throughout the past year. Revenue and earnings fell consistently over the same period, and the stock is off 50%.
Low price-to-book stocks suffer from a similar problem. Who cares if the stock sells for a discount to its assets if the company can't earn a good return on said assets? United States Cellular has seen its returns on assets and equity decline steadily since 2011. Thus, despite a history of trading near or below book value, the stock is down 22% since the beginning of last year.
Investment strategies are just that: strategies. Recognize that every company is different. Analyze the underlying strengths and weaknesses before you buy. Because the more you understand about what drives a business to grow, the more likely it is you'll pay a fair price to own a piece of it, Tim says.
Do you agree? Please watch the video to get Tim's full take, and then leave a comment to let us know which investment strategies have worked best for you.
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The article 2 Investment Strategies That Could Destroy Your Returns originally appeared on Fool.com.Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple, Google, and Netflix at the time of publication. He was also long Jan. 2014 $50 Netflix call options. Check out Tim's web home and portfolio holdings or connect with him on Google+, Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool recommends Apple, Google, and Netflix. The Motley Fool owns shares of Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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