Should you automatically reject those companies that erred or worry about past share price trading ranges?
Rejecting companies that have made mistakes: Companies that are striving on a frontier, particularly a technological frontier, will experiment with projects; and many of these will fail. Technological pioneers must be permitted to endeavour, to go for the big breakthrough.
Look for a good average success to average failure ratio. If the firm is run by good managers bad performance will be transient.
Short-term focused investors have a habit of over-responding to earnings drops:
‘time and again the investment community’s immediate consensus is to downgrade the quality of the management. As a result, the immediate year’s lower earnings produce a lower than the historic price earnings ratio to magnify the effect of reduced earnings. The shares often reach truly bargain prices’. (Philip Fisher)
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