After discussing the three essential dimensions that make a stock worthy of investment, Fisher now discusses Dimension #4: the investment's price. Fisher's explanation of why stock prices change is as follows:
"Every significant price move of any individual common stock in relation to stocks as a whole occurs because of a changed appraisal of that stock by the financial community."
For the companies in which Fisher is interested, the "appraisal" is most easily measured in the price to earnings ratio the market accords a particular stock. Fisher looks for price appreciation in two ways: first, from growth in the company's earnings, and second, from the increase in the stock's P/E ratio. Fisher offers that the latter source of appreciation can often play the larger role in a stock's price appreciation.
Fisher argues that there are wide variations between the financial community's appraisal of a stock and the true set of conditions surrounding it. Sometimes, this divergence can last for a few months, while at other times it can persist for years. When this divergence exists, the investor should take advantage of the situation.
The lowest risk investment opportunity exists when a company measures high in regard to the first three dimensions, but has a lower P/E than fundamentals warrant. Next risky, though still suitable for investment, are companies that again rate high on the first three dimensions, and have a P/E in line with these fundamentals. If a company truly has the desired attributes of the first three dimensions, the stock shall nevertheless appreciate in price.
The most dangerous group of stocks are those with a financial-community appraisal far higher than is justified by the fundamentals. Purchase of these shares cause sickening losses and can cause individuals to avoid stock ownership in droves. There are many such examples, and Fisher goes on to name a few.
Fisher continues his discussion of the right price at which to buy a stock in the next chapter.