In the short term, Graham and Dodd believed, the stock market tends to be highly emotional. Overtaken by fear and greed, investors overreact to news, both good and bad. They will reward a rapidly growing company too richly and punish a poorly performing company too severely. This, of course, creates opportunities for the skillful value investor. He will focus on depressed stocks that are temporarily out of favor and, after carefully evaluating the companies' strengths, invest in those whose stock prices don't fully reflect their true value.
Stock prices are a measure of market expectations.
As Graham and Dodd explained, however, the future frequently does not turn out as planned. So, if a high-flying stock fails to live up to expectations, it is vulnerable for a nasty fall. Unloved and unwanted, these beaten stocks are already expected to plod along, so future bad news may not drive down their stock prices as severely. Heartland Advisors, Inc.