From Importance of ROIC Part 1: Compounders and Cheap Stocks One very crucial point is often left out of these studies…. Holding period. Most of these studies pick a group of stocks based on some value measure (low P/E, etc…) and then after 1 year (or sometimes 2 years), sell those stocks and replace them with a new set of stocks that match that valuation criteria. Most of the studies turn their portfolios over once a year. Over short periods of time, paying low P/E ratios or low EV/EBIT ratios will work very well, as the market typically corrects itself over 1-3 years or so. But over time, if you intend to participate in the long term results of your business and own the stock for 5-10 years or longer, you should be much more concerned with the quality of that business. I prefer to find really cheap stocks, but I want them to be businesses that I think can grow intrinsic value.

From Importance of ROIC Part 1: Compounders and Cheap Stocks

 One very crucial point is often left out of these studies…. Holding period. Most of these studies pick a group of stocks based on some value measure (low P/E, etc…) and then after 1 year (or sometimes 2 years), sell those stocks and replace them with a new set of stocks that match that valuation criteria. Most of the studies turn their portfolios over once a year.

Over short periods of time, paying low P/E ratios or low EV/EBIT ratios will work very well, as the market typically corrects itself over 1-3 years or so. But over time, if you intend to participate in the long term results of your business and own the stock for 5-10 years or longer, you should be much more concerned with the quality of that business.

I prefer to find really cheap stocks, but I want them to be businesses that I think can grow intrinsic value.