It’s easy to get caught up in market narratives. When news flow is good and sentiment positive, investors tend to buy popular securities at any price, paying lip service to valuation and risk. When news is bad and share prices fall, fear of loss makes investors retreat — from real risks but also those that may be unfounded or overstated. While it is important to avoid getting swept up in the prevailing hype or gloom, it is equally important not to ignore the narrative altogether. Some of the best investment opportunities come from strong negative narratives; in fact, they are a necessary precondition to buy quality companies at cheap valuations. Consider Microsoft, a company whose products many use daily. In 2012, Microsoft’s share price had been flat for a decade, trading at $20-$30. Over that period, earnings per share had continued to compound by more than 10%. The popular narrative then was that technological advancements such as mobile, cloud computing and the move away from up...
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