2011 Stock Market Tips- Valuations Do Matter

Stock market performance is almost impossible to correctly predict on a yearly basis. Many analysts like to give target prices for the Dow Jones Industrial Index, but this is just sophisticated guesswork. Everyone knows that the stock market has a mind of its own, and the unpredictability of the market is high in the short-term. Having said that, there are some basic ideas about investing that should always be remembered no matter what kind of economic environment we are in. As a financial professional, it concerns me that many investors have decided that valuations no longer matter. I think this couldn't possibly be farther from the truth.

In the past it was a given that valuations of a stock matter in a big way, but slowly the mindset of the average investor has changed in the past few years. It seems that now many people believe that only the business model and the economic environment matter, and that momentum can carry the day for the stock price. I'm here to tell you that this is a dangerous way to look at in 2011 or any other year in the future.

Why do valuations matter? They matter because buying a stock isn't just about buying into a solid company. It's also about getting in at the right price. Let's take a look at Microsoft as a good example of this. By all accounts, Microsoft is a solid company with strong fundamentals. Did it matter what the valuation of the stock was when you purchased it? The answer is clearly yes! If you had purchased Microsoft in the 1990's when it was at a split-adjusted price of $2 to $3 per share, you are still sitting pretty. If you purchased Microsoft ten years ago today, you would be less than enthused with your 13.3% loss on your initial investment. Microsoft was a terrific company in 2001, but it was also overvalued. Getting into a solid company is only half the battle, the rest is getting into the stock at the right price!

As you sit down and make your decisions about how to invest in 2011, make sure you remember to seriously consider the valuation of that particular asset. It really is no different than price comparison shopping for something like groceries. Why would you stock up on soup when it is full price if you can do the same for much less money when it is on sale? In the same manner, make sure you stock up on the investment of your choice when the price is right!