Because of hype some stocks can become very expansive. Even if the company performs well in the future, the stock price is not. This is the case because the price has already discounted the price. But if the company disappoints the stock will get hammered.
If you buy cheap stocks and the company disappoints a lot of it is already in the stock price. But if the company does well the cheap stock can do great.
With cheap i don't mean a low absolute price. But a low price of the stock relative to its earnings. A way to measure it is the p/e ratio. Cheap stocks are also measured by a high dividend yield. This is a high dividend pay relative to the stock price.
Warren Buffet and Benjamin Graham buy stocks who are below their intrinsic value. This means looking at the companies fundamental business position. It is important to guess what the company will make and how stable these earnings are. A stock is a buy when mister market values a company below the value it really deserves.
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