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Bob:
Like a lot of ideas, the theory is great but the execution may not be
so easy. If the "undervalued" stock is of a low value because the
company is going down the tubes, then the disparity between that stock
and a higher valued one may increase, not decrease. There is usually
some reason why a stock is undervalued; it may be because the company is
not as good at what they do as the "overvalued" compay.
Dick
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Bob Young wrote:
> Is anyone familiar with the concept of 'Neutral investing', otherwise
> known as 'hedged pairs'?
> This is a stock investment strategy involving the selection of a pair
> of stocks in the same industry gorup.
> My understanding is that one searches for the most undervalued and the
> most overvalued stocks in that
> group, and then buys the undervalued one and sells short the
> overvalued one, in monetarily equivalent
> quantities.
> Since both stocks should, over time, move toward a fairer valuation,
> the expectation is to profit from this
> convergence, independently of overall market movement. Even if the
> market goes sideways, the
> undervalued stock should, if the fundamentals are supportive, gain in
> value, while the cooling market fever
> should reduce the appeal of the overvalued stock, causing it to fall.
> If the overall market declines, then both
> stocks will decline with it, but the overvalued one should fall faster
> as the higher PE ratios are usually the
> first to deflate in a bear market.
Etc, Etc.
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