When a stock or sector trades at a meaningfully discounted valuation to market averages, there’s always a reason why.
Sometimes there’s an opportunity for investors to cash in from closing that discount, if the reason proves temporary. And sometimes, the valuation gap persists or even widens, if the challenge behind it becomes more acute.
If your primary objective is faster gains through trading, betting on stocks to close valuation discounts can be quite lucrative. But unless your timing is spot on, it can be quite easy to lose patience and move on to something else.
That’s why value investing in general is usually better suited for those with a longer-term horizon. And the prime candidates are income investors, who by definition need to think in terms of holding periods of a year or more. That’s the minimum to avoid cash flow being devoured by taxes, brokerage commissions and timing concerns.
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