This is my favorite time of the year for two reasons. One, I love giving people I love gifts and spending time with family and friends. Secondly, and perhaps more importantly, I love seeing how many investment publications come up with their best opportunities to invest in 2007 (or whatever the next year may be). As I read through one magazine after another I notice the real problem in the predictions. Everyone is “guestimating” the direction of the markets. If you go to your local book seller you’ll see the magazine shelf lined up with “Investors Guides” or “Where to Invest in the Coming Year.” I have to laugh at this because as investors you should know that there is only one “Guide!” Warren Buffett would put it this way:
RULE #1: Don’t lose money!
RULE #2: Never forget RULE #1
Yet each year publications need to sell more magazines by giving people a guide that is presumably only good for that year. Is that striking you as ridiculous?
Every year there are wide fluctuations in the market price of individual securities. All one has to do is pick up your local paper and look at the highs and lows of the last 52 weeks. In essence if you waited to buy at the low and sell at the high you would do extraordinarily well, yet as investors we feel a sense of emotional urgency behind buying stocks TODAY! Professionals thrive off this urgency when they are selling you their products.
Let’s take a look at a couple of companies that most will be familiar with: Circuit City & Best Buy.
The company's 52 week high/low prices:
CIRCUIT CITY: $18.25 - $31.54
BEST BUY: $42.75 – $59.50
Price as of 12.21.2006:
CIRCUIT CITY: $19.60
BEST BUY: $49.29
Now does this mean that Best Buy is 2.5 times more valuable than Circuit City or that Circuit City is more of a discount? The misconception of looking solely at the stock price might lead either direction depending on where your personal analysis takes you. However, let’s examine the real value.
My goal is to try and build upon each article, yet some material may be redundant in nature. If this happens, I’m sorry.
The company's market capitalization:
CIRCUIT CITY: $3.4 Billion
BEST BUY: $23.7 Billion
The company's net income:
CIRCUIT CITY: $149.7 Million
BEST BUY: $1.3 Billion
The company's revenue:
CIRCUIT CITY: $12.5 Billion
BEST BUY: $33.7 Billion
From these numbers we can see that Best Buy clearly has an advantage in regards to sales and net income, but it is priced higher in the market as well. The real test comes down to the initial rates of return. If you paid $23.7 Billion for best buy you’d earn a little over 5.4% this year while if you purchased Circuit City your initial return would be lower than 4.4%. If they both grew at the same rate going forward this 1% difference would equate to a sizable advantage for the buyers of Best Buy even though the price is 2.5 times that of Circuit City’s.
I view a company’s stock like a bond that has a rising or falling value depending on the underlying company’s earnings. For instance if both companies were able to increase their earnings 10% a year over the next 5 years the rate of return would be 2 full percentage points higher for Best Buy each year…
The point? The stock quote rarely equates to the real value of the business and during each and every year the value of an individual business will stay relatively steady while the company’s stock will have wide swings in price. Therefore, stand in the batters box and wait for your fat pitch!
Jonathan D. Poland
www.pigsgetrich.com
RULE #1: Don’t lose money!
RULE #2: Never forget RULE #1
Yet each year publications need to sell more magazines by giving people a guide that is presumably only good for that year. Is that striking you as ridiculous?
Every year there are wide fluctuations in the market price of individual securities. All one has to do is pick up your local paper and look at the highs and lows of the last 52 weeks. In essence if you waited to buy at the low and sell at the high you would do extraordinarily well, yet as investors we feel a sense of emotional urgency behind buying stocks TODAY! Professionals thrive off this urgency when they are selling you their products.
Let’s take a look at a couple of companies that most will be familiar with: Circuit City & Best Buy.
The company's 52 week high/low prices:
CIRCUIT CITY: $18.25 - $31.54
BEST BUY: $42.75 – $59.50
Price as of 12.21.2006:
CIRCUIT CITY: $19.60
BEST BUY: $49.29
Now does this mean that Best Buy is 2.5 times more valuable than Circuit City or that Circuit City is more of a discount? The misconception of looking solely at the stock price might lead either direction depending on where your personal analysis takes you. However, let’s examine the real value.
My goal is to try and build upon each article, yet some material may be redundant in nature. If this happens, I’m sorry.
The company's market capitalization:
CIRCUIT CITY: $3.4 Billion
BEST BUY: $23.7 Billion
The company's net income:
CIRCUIT CITY: $149.7 Million
BEST BUY: $1.3 Billion
The company's revenue:
CIRCUIT CITY: $12.5 Billion
BEST BUY: $33.7 Billion
From these numbers we can see that Best Buy clearly has an advantage in regards to sales and net income, but it is priced higher in the market as well. The real test comes down to the initial rates of return. If you paid $23.7 Billion for best buy you’d earn a little over 5.4% this year while if you purchased Circuit City your initial return would be lower than 4.4%. If they both grew at the same rate going forward this 1% difference would equate to a sizable advantage for the buyers of Best Buy even though the price is 2.5 times that of Circuit City’s.
I view a company’s stock like a bond that has a rising or falling value depending on the underlying company’s earnings. For instance if both companies were able to increase their earnings 10% a year over the next 5 years the rate of return would be 2 full percentage points higher for Best Buy each year…
The point? The stock quote rarely equates to the real value of the business and during each and every year the value of an individual business will stay relatively steady while the company’s stock will have wide swings in price. Therefore, stand in the batters box and wait for your fat pitch!
Jonathan D. Poland
www.pigsgetrich.com
