This is a reworking of an investment tip I did about 7 years ago. A few conversations I’ve had recently about stock prices has prompted me to do this one again.
There is a fundamental error made by many investors. They think a stock’s price by itself is meaningful. I’ve had many conversations where someone tells me “Well, that stock is $100 a share, it’s awfully expensive”. But stock price by itself doesn’t tell you anything. It’s like telling someone, “The candy bar is awfully expensive, it’s $1”. But how big is that $1 candy bar? If it’s a 1 pound bar, that’s a bargain. If it’s a 1/2 oz. bar, that is relatively expensive and it better be pretty darn good candy.
Let’s look at a stock market example. Say an investor was trying to decide which electronic device manufacturer to purchase, Emerson Electric or Black and Decker. Currently Emerson’s stock is $49 whereas Black and Decker’s is at $94. So is Emerson’s stock the better buy? Not necessarily. Because Black and Decker only has about 66 million shares of stock outstanding, versus 800 million for Emerson. One share of Black and Decker will give you a bigger percentage of the company than 10 shares of Emerson.
So is Black and Decker the better buy? Not necessarily. Emerson is a much bigger company, a $38 billion market cap versus only $6 billion for Black and Decker. One share of Black and Decker gives us a bigger piece of a small pie. One share of Emerson gives us a smaller piece of a much bigger pie. It’s all relative. That’s why investors should never let price be the guiding factor either way in deciding whether to make a stock purchase. With the candy bar it’s price for the size, plus the quality. It’s exactly the same for stocks.