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Lessons for Investors

The most succinct description that can be provided for an effective “good company” strategy is that you want to buy good companies that are not being recognized by the market as such. Given that good companies outperform their peers and have superior financial results, how is it possible to keep them a secret? The answer may lie in the market reaction to short-term events.

First, markets sometimes overreact to disappointing news from good companies, even though the news may not have really have significant long-term value consequences. For instance, assume that Coca-Cola reports lower earnings per share because of foreign currency movements (a stronger dollar reduces the value of foreign earnings) while also reporting strong operating results (higher revenues, more units sold, etc.). If the market price for Coca-Cola drops dramatically, it would represent an overreaction since exchange rate effects tend to smooth out over time. You may be able to buy the stock at a bargain price before it bounces back up.


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