Last weekend I was putting together an article for the subscribers of Wonderful Businesses in which year to date performance was calculated for each Rule #1 company. We always provide quarterly updates of our Rule #1 members (companies) so it was time to tally up the figures. To be up to date and have fun with last Friday’s 168 point market jump, I added in July 1, so we’re looking at two quarters and a day.

What the numbers revealed was rather interesting; undervalued Rule #1 members had a return of 8.8%, not bad and ahead of the 6.5% S&P index benchmark. But the overvalued members, those trading above sticker price, are up 18.2%. Now this is something, aren’t the undervalued members supposed to go up and the overvalued members down?

Yes, but when viewed from a long-term perspective. If one really thinks about it, the results are not altogether surprising when taken in a six-month vacuum. Why? Because the market is going through a love affair with this particular batch of overvalued stocks, which is why their share prices became inflated to begin with. The reason they’re doing so well in 2011 is because the love affair hasn’t ended. But if there is one thing we learned from Mr. Town, it is that the market corrects. Sometimes it takes a year or multiple years, but it happens.

This is why five years from now, we can revisit these two groups of companies, the undervalued and the overvalued, and see where they are then. It is almost certain that this current collection of undervalued stocks will be far ahead in performance to the overvalued. Perhaps we’ll even see things more aligned by the end of this year.

Posted in Rule #1 Centered
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