Vitiliy Katsenelson, author of The Little Book of Sideways Markets which I reviewed here, wrote a piece of Institutional Investor in which he discusses Cisco Systems (NASDAQ: CSCO). As usual for Katsenelson, he cuts right to the heart of the matter while providing unique insight. I consider his writing to contain among the most value-added content of any financial writer today, and I would recommend adding his blog to your RSS reader.
[O]ne of the core reasons markets are — and will remain — inefficient: because human beings are efficient.
To function in everyday life, we use our brains to simplify complex problems through heuristics like pattern recognition. We become accustomed to drawing straight lines when we see two points, and if we get a third or fourth point that fits the line, our confidence about the continuity of that line increases exponentially.
…
Cisco shattered the dot-com dreams of many investors in the years following March 2000, when it hit $80 a share and, for a brief moment, was one of the most valuable companies in the world, sporting a modest price-earnings ratio of 100-plus.
Since then, gravity has caught up with Cisco’s shares (it always does), which have declined almost 80 percent from their high, to $17. Most investors who bought the stock during the past decade have either lost or made no money. Draw a straight line through its stock price chart and you might conclude that Cisco will either decline to zero or, at best, go nowhere. Add a few recent quarters of disappointing Wall Street guidance and you have an untouchable, unrecommendable stock.
However, the fundamentals tell a very different story. …
Read the rest over at Institutional Investor.
Author Disclosure: Long CSCO
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