Scores of investors often regard Benjamin Graham as the grandfather of value investing. Even those who shun Graham’s methods of analyzing securities tend to revere quotes attributed to him. For example, on market complacency, “… chief losses to investors come from the purchase of low-quality securities at times of good business conditions.”

In this discussion, we can assume that business conditions are relatively good. After all, over the last five years, corporations have refinanced their debts, boosted profit margins, strengthened their balanced sheets, increased productivity and avoided the costs associated with wage inflation. With respect to the quality of securities, investors have been mesmerized by stocks with high price-to-book and high price-to-earnings ratios, particularly shares of the companies that PowerShares NASDAQ Internet (PNQI) tracks.

PNQI 50 200

Not surprisingly to value-oriented investors, then, PNQI has fallen on rough times. The exchange-traded fund is roughly 15% off its all-time highs. That said, dip buyers may not be ready to throw in the ticker tape. PNQI has escaped bear market territory by rallying 6.5% off its May lows.

Whether you consider yourself a value investor, a growth investor or something else entirely, ignoring a wide range of damning evidence could be devastating to your wealth. From a technical perspective, PNQI’s 50-day moving average will cross below its 200-day moving average for the first time since the bearish summer of 2011. From a fundamental perspective, price-to-earnings data on prominent holdings like Netflix (NFLX), Priceline (PCLN) and Facebook (FB) epitomize 1999-style dot-com fervor.

So what makes more sense in an environment where business conditions are relatively firm, and where the U.S. Federal Reserve aims to be remarkably stimulative for many months into the foreseeable future? In the technology space, I continue to identify with First Trust Technology Dividend (TDIV). For starters, this fund’s price-to-earnings ratio (14.7) sits at a 15%-20% price discount to the broader S&P 500. Moreover, TDIV offers more cash flow via its 2.7% SEC yield than ETF proxies for the market benchmark. In addition, TDIV demonstrates remarkable relative strength compared to PNQI.

TDIV PNQI Price Ratio

In a raging bull market like the one that we witnessed throughout 2013, an investor could easily anticipate outperformance from high beta assets like PNQI. Yet biotech, small cap, Internet and rapid appreciators do not have the same wind at their backs. Could you buy the recent dips on small-caps or biotech or “New Tech?” Some people will. However, when broader markets move sideways for three months, and when more aggressive holdings experience dramatic price swings, it’s time to pull out your copy of Securities Analysis. Benjamin Graham can still teach you a thing or three about avoiding big losses.

Related Articles
  1. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  4. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  5. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  6. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  7. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  8. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  9. Mutual Funds & ETFs

    ETF Fees: Why BlackRock is the Latest to Cut Them

    Low expense ratios are a big selling point for ETFs, but are they being focused on too much?
  10. Chart Advisor

    Is This The Beginning Of A Downtrend In Home Builders?

    Falling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center