When investing your money you’ll hear many different forms of opinion. Experts like Dave Ramsey will tell you to invest in growth stock mutual funds, others will say that index funds are the way to go. Then there is a group of investors that says you can beat the market by buying “undervalued” stocks.
The question that arises is, is there such a thing as an undervalued stock, and if so, is there a reliable way to take advantage of this “market inefficiency”.
Your investment philosophy in stocks is largely dependent on your opinion on what’s called the Efficient Market Theory (EMT). This theory states that markets are fully efficient. In other words any given price in the markets reflects the cumulative “wisdom” of all investors actings logically on fundamental data regarding value.
Essentially the market, according to this theory, is always acting completely logically based on the current information. So at any given point the market isn’t overvalued or undervalued – it’s priced at the fair equilibrium price given the current information available.
Some practitioners and theorists have brought up concerns with the theory stating that it doesn’t accurately reflect the actual results we see in the real world. For example, in the tech “bubble” of 2000, were investors acting completely logically on the market’s information or was there inefficiency?
Ultimately you’ll have to make your own determination. At the moment there isn’t unanimous agreement by the community.