Conversely, stocks with very low trading liquidity, little investor interest, and negligible fund participation are likely to have skewed valuations as well, as the lack of coverage often leads to overlooked data and information that are key to a comprehensive valuation.
When a stock gets too much attention, the likelihood that its valuation is skewed increases. An example of this is stocks in major indices with the highest trading liquidity, investor interest and fund participation. If too many retail investors are involved, the price it trades at would likely not reflect its true valuation, compared to if it were trading solely with a group that does not prioritise short-term sentiment.
To qualify this statement and state the purpose of this article, the stocks in focus will be those suited to long-term value investing rather than short-term trading. However, the latter can be highly profitable if done correctly. Also, in this context, fund participation refers to funds that purchase stocks simply because their mandate requires exposure to a specific benchmark or to the largest stocks in an index.
