Underpriced opportunities are either the result of short-term dislocation or fundamental concerns. It’s important to know which of these forces are at play.
For example, many have drawn dubious parallels between the dotcom bubble and the current fixation on AI-related stocks. Such noise undermines the complexity of identifying patterns that really matter.
They need not do so because once early investors successfully back what is considered a fundamental change, others join in and reinforce the performance. All types of complex criteria can then be used to judge the character of the trend and how to invest.Financial markets are inherently cyclical and there is a strong degree of herding. A good case for an investment naturally attracts others and valuations might become secondary.
The story is rarely quite that simple. Many smaller companies had weak growth strategies or no cash flow, some small-cap sectors are innately higher risk, such as mining exploration companies or biotech, and M&A activity dissipated given the low level of deals from private equity.China has troubled investment markets for some time because of its changing attitude to sectors such as education providers, video gaming and its well-known issues with property developers.
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