Yeah, I know four is a weird number. But, I hear this stuff so often when I tell people about the Elephant’s Paycheck that I had to share.
“I love Apple, but at $500 a share it’s expensive.”
Yeah, pretty much the price doesn’t have anything to do with anything. It’s just like splitting the stock doesn’t have anything to do with things. After a split, you just have twice as much at half the value. Stock price doesn’t matter except in the context of earnings. That’s why the PE ratio metric (price:earnings ratio) is important. That gives a context for the price that lets you compare different companies to each other.
Thinking about cheap or expensive, the question to really ask is how much “earnings” does the stock at a given price buy me? The PE ratio tells you that. A lower PE buys you more earnings per share for each share purchased.
Knowing Some Trick
“Don’t buy Apple, buy it’s supply chain.”
Brilliant, I’m not sure why this piece of wisdom has eluded all the professionals.
Seriously, that last sentence was sarcastic. Maybe buying the supply chain is a good idea, but I wonder why this seems to be a response that people use to imply they know some deep trading secret.
I’d buy the company making the money.
“I’ll sell if it gets too high, then buy it back when it drops.”
Buy low, sell high is a great strategy. But if you’re a person of regular means (not a trader) you’re likely giving a ton of your gains to the IRS on each trade, which means you take all the risk, and they get half the reward. You’re really just betting on the volatility, hoping it goes back down enough to cover what you’ve given to the IRS and then some, so when it goes back you get to put some money in your pocket. A good idea, but as a strategy… “hope” is not such a great strategy.
The Elephant’s Paycheck is less like betting, and shares less of your earnings with the IRS.
“It hasn’t gone anywhere in a while, so it should jump.”
There’s no reverse law of gravity that says if a stock hasn’t gone up in a while, it’s building up some kinetic potential that can beat market inertia. I like to think of this as “wishful thinking”, and when you invest this way, it’s “wishful betting”.
Some companies have a reason to not go anywhere for a while. Usually it’s due to some uncertainty, like when Duke Energy had some CEO drama after recently completing a merger with Progress Energy. The Progress Energy was supposed to become CEO after the merger, but at the last minute Jim Rogers took his place. The controversy depressed the stock until it was resolved. However, when a company’s market position is unclear, possibly due to permanent changes in the market (and the economies of that market), just because the stock’s down for a while doesn’t mean it has to come back. Think Microsoft. It’s been mostly flat for 10 years. Does that mean it bounces? Surprisingly, some people think so simply because it’s been flat for so long.