Motley Fool has a good article about shopping cheap stocks. It is one of those articles that remind me when reading financial articles, always read the whole thing before doing anything about it.
The article starts with a very mechanical approach to finding the cheapest stock of 1999. I love mechanical approaches as they tickle my lazy side. My cheap side has been burnt enough from being too lazy that I’ve learned that mechanics are never enough.
Anyway, while this selection method works great for the first stock, it doesn’t hold consistent down the line. The dart in action once again.
The one thing I don’t like about the article is where they have a table of stocks picked with the mechanical approach that shows an average upside of 107% over 5 years of picks. Firstly, that is way too narrow of a sampling to be reliable, and secondly the star example of the article throws the average so far off that if it wasn’t there, you’d be just as well off with a money market fund. I don’t think it was the author’s intention to promote following the approach blindly, but I think it did merit more comment on why profits may be smaller than they appear.