How Corporate Mistakes Can Make You Money

Like a thrifty shopper, value investors hunt for companies that are “on sale”. These sales are caused by inefficiencies in the market. Sometimes these inefficiencies have little rhyme or reason. They could be caused by a lack of media coverage or poor advertising. Sometimes though, the stock goes on sale for a very obvious reason. For a value investor, this can create opportunity.

Buy Quality Companies

First of all, some words of warning: I am not telling you to go buy failing companies because the stock price is low. If a company is in serious trouble, it is common sense to stay away. We are looking for great companies at great prices, not weak companies at really great prices. The quality of the company is and continues to be of paramount importance.

Ms. Market

However, sometimes when a large established company goes through a minor setback, the market over reacts and you can purchase their stock at a bargain price. Think of the market like a high school drama queen. When things are going good it’s the best day of her life and nothing could go wrong. But when things go slightly awry all of a sudden the world is ending. The market reacts the exact same way. Keeping your eyes open for these minor setbacks can let you know when a certain stock might go on sale.

A good current example of this is that Apple recently lost a court case in Europe and has to pay out fifteen billion dollars. At first this may seem like a lot. Fifteen billion dollars is a lot of money. But Apple is a large and well established company. The currently hold somewhere around 200 billion dollars in cash. That isn’t even taking into account the real estate, inventories, and capital they also own. So while fifteen billion is a lot, it is a minor setback for them. They will easily recover and business will continue as usual.

Markets Overreact

But how do you think Ms. Market will react when she hears that Apple has to pay out fifteen billion? There is a decent chance that a lot of people will want to sell out of Apple, fearing that the losing the court case will hurt the company. This could cause the stock price to experience a temporary dip as people sell, which will soon return to normal prices once people realize that business is continuing on as usual. Once again, remember that the quality of the company is the still the most important factor.

By playing off the markets volatile mood swings, value investors can turn a profit off of minor setbacks. Taking care to avoid a failing company is very important to any investors using this strategy. However, if an investor is diligent and keeps his ear to the ground looking for corporate mistakes, it can be a very profitable strategy. Following the mantra of value investing, this is another way to get great companies at great prices.

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