3 Fatal Flaws of Investing Revealed

Some people are starting to believe that value investing is dead.

Yes, that sounds extreme. However, since this bull market began in 2022 it has been very growth focused. 

Especially true for any shares having  anything to do with AI. This explains the strength of the Magnificent 7 stocks that all are involved in AI in some fashion. 

Unfortunately if history continues to repeat itself, then the rest of this bull market is set to be pretty sleepy for the average investor. Meaning that the first few years of a bull market is when the big, easy gains are made. This leads to the tamer results going forward.  

No…not a bear market. Just kind of anemic single digit annual returns for the major indices. 

Gladly that is the result for the average stock. Whereas our goal is to find above average stocks. Nay…great stocks!

Value is likely to be a key ingredient for the stocks that will shine in the years ahead as they have been a bit neglected the past few years. So that is where investors will seek outperformance. 

That doesn’t mean that every value stock will rise. In fact, there are 3 fatal flaws of value investing we need to avoid to be on the right side of the action in the year ahead.   

1.  Value Traps (where stocks head lower and lower)
2. Classic Value Metrics Don’t Work Anymore
3. Lack of Timeliness Deadens ROI

Avoiding those 3 fatal flaws with the Zen Ratings will point the way to the best 43 value stocks which we share at the bottom of this article. Feel free to skip ahead if you want. 

For the rest of you, let’s discuss these 3 fatal flaws to uncover value stocks that are primed to outperform.

Fatal Flaw #1: Value Traps

Value investors fall in love with the metrics sometimes which blinds them to other glaring problems. In particular, falling for a stock simply based on having a low PE.

The Value Trap problem emerges when investors don’t realize that the prime reason for the low PE is that the earnings outlook is diminished. Meaning it is a poorly run company that is only going from bad to worse. 

This leads to a string of earnings misses and even lower stock price. 

The best way to avoid these value traps is by ensuring that you are buying shares in a healthy growing company. 

The Zen Ratings accomplishes this by analyzing 26 factors of Financial strength and 22 factors of Growth. Those scoring A & B for these ratings provides very solid evidence that the company is fundamentally sound. 

The sum total of this analysis GREATLY improves the odds of being in a company with improving earnings prospects that leads to more earnings beats and rising share price. This resolves the Value Trap dilemma.  

Fatal Flaw #2: Classic Value Metrics Don’t Work Anymore

Consider this…

Computer driven trading now dominates the investment landscape. No longer is it seasoned investment managers making the decisions. Instead the vast majority of trades are run by these quant models.

This has been true for more than 15 years. And truly billions of dollars have been thrown at these quant models to squeeze out every last drop of profit hidden in shares.

So long ago these models tapped into the benefit of the typical value approaches like PE, Book Value, PEG, Price to Sales etc.

Now after years of high volume trading of these models it could be said that the value well has run dry.

More precisely, the best value metrics have very little benefit on their own. So the key to success is to stack as many of these metrics in your favor as possible. Like the 21 value metrics inside the Zen Ratings model.

To be clear, each and every single one of these 21 value metrics on its own has been tested to find stocks that consistently outperform the market. 

That advantage may be very little for each individual factor. That is why we are stacking 21 independent value criteria one on top of the other to stack the odds of outperformance FIRMLY in our favor. 

Fatal Flaw #3: Lack of Timeliness Deadens ROI

Value is considered a contrarian investing style. That’s because you are betting on companies that are currently out of favor hoping that the share price turns around.

Unfortunately the longer it takes...the more it harms your Return On Investment.

Gladly the Zen Ratings focuses on 23 different factors that greatly increase the timeliness and ROI of your stocks.

22 Momentum Factors

1 AI Factor

We talked about the timeliness benefit of the AI factor in my recent article: How Can AI Help My Stock Investing?

So today we will focus on the 22 measures of Momentum in the Zen Ratings model. 

Indeed Momentum is just like physics where “a body in motion... stays in motion”.

Our model is trying to capture that through a combination of short term…medium term…and long term measures of positive price action that increases the odds the stock will stay in favor. Meaning it will be a timely selection helping to resolve the 3rd and final flaw of value investing. 

All in all the Zen Ratings applies 115 different factors to find the best stocks. The combination of which truly helps overcome the 3 fatal flaws of value investing and is the perfect tool to help you beat the market in the months and years ahead as it should be very much value focused. 

What to Do Next? 

See 133 Best Value Stocks 

Every day in the Stock Ideas section of our website you will find a popular screen called “Best Value Stocks to Buy Now”. 

This screen starts with all A/B Zen Rated stocks that also have A/B for the Value score. That leads to a much broader field of 379 appealing stocks. 

Just one click later on our Edit Criteria feature will narrow it down to only A rated overall stocks that just score highly for Value. Truly the best value stocks in our universe primed for serious outperformance. And right now there are 133 of these special value stocks. See them here >

Top 20 Value Stocks According to Steve Reitmeister

My dad started teaching me about the virtues of value investing at the early age of 13.

This made perfect sense as he was a highly respected Certified Financial Planner who specialized in preparing clients for long haul to enjoy healthier retirements. 

But also as a child born during the Great Depression he was not going to overpay for anything…especially a stock. 

These value roots have been ingrained in me from the  start. And is very much a part of how I select stocks for my Zen Investor portfolio. 

But as shared above, I also understand the pitfalls of value investing. Gladly by harnessing the power packed inside the Zen Ratings, it helps to solve these problems leading to serious outperformance. 

Right now I have pinpointed 20 undervalued stocks that have tremendous upside potential. 

And 2 more strong buy stocks are being added to the portfolio this coming Wednesday November 5th. 

To understand my unique investing process to unearth more 100%+ winners, and to get your hands on my top 20 stocks, including 2 more being added this coming Wednesday, then just click the link below… 

Discover the Zen Investor & My Top 20 Stocks Now > 

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor-in-Chief of WallStreetZen

Want to get in touch? Email us at news@wallstreetzen.com.