The Case for Not Worrying About "Overvalued" Stocks


David Gardner is the first and only investor I've ever known of who likes a stock to be called "overvalued" in the financial press. He's published a list of the six signs he likes to see in a rule-breaking growth company, and two of them directly relate to valuation, but not in the way any investor ever thinks about valuation. Here's the full list:

  1. Top dog and first-mover in an important, emerging industry.

  2. Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.

  3. Strong past price appreciation.

  4. Good management and smart backing.

  5. Strong consumer appeal.

  6. You must find documented proof that it is overvalued according to the financial media.

While those seem counterintuitive -- buy low and sell high, right? -- David's track record is hard to ignore.

Early last week, in a wide-ranging interview in our new studio space in Alexandria, Va., I asked the Fool co-founder how he arrived at those conclusions. You can watch his full answer in the video below (run time: 5:00), but -- spoiler alert -- he came to those conclusions through a combination of William O'Neil's book How to Make Money in Stocks, David's early experiences investing in technology stocks, and his realization of how misleading simple valuation ratios can be.

If you'd like to learn more about David's investing ideas, try a free, personal tour of his flagship service, Supernova. Inside you'll discover the science behind his market-trouncing returns. Just click here now for instant access.

The article The Case for Not Worrying About "Overvalued" Stocks originally appeared on managing editor Brian Richards holds no position in any company mentioned. Fool co-founder David Gardner owns shares of and AOL. The Motley Fool owns shares of Motley Fool newsletter services have recommended buying shares of The Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.