Price does not matter

What if I told you that price does not matter? Would you laugh at me? I do believe that, however. Price does not matter–what matters is value. Whether I pay $2 for cereal or $10 matters little–what matters is the value. If the $2 is for 2 cups of Cheerios, while the $10 is for 10 boxes of Cheerios, I would say that the $10 represents a better value. Yet there are plenty of people who will automatically go for the cheaper item, without considering its value.

The same thing happens in investing and in the stock market in particular. People make a big deal out of the price of stocks or stock indexes. Ooh, “the Dow is at a new high, we should buy now”. Or “ooh, the Dow has risen too much–it is bound to fall!” This is stupid. What matters is the value. Sure, stocks have risen a lot recently (before the recent fall), but much of that is rightly due to solid earnings reports. As always, what matters is the cost of a company relative to its future cash flows. To the extent that its future improves, its price should increase; to the extent that its future dims, its price should decrease. Also, the price of the stock itself does not matter–a company could have few shares priced high (such as Berkshire Hathaway) or many shares priced low (such as Nortel), but that does not affect the value.

So buy when you get a good value for your money and sell when your holdings are overpriced. That is the key to winning in any type of investing.

Mark Hulbert has written about how fast price rises do not mean a stock index will likely fall.

Disclosure: I like Cheerios, though I have been known to eat the impostor Joe’s O’s (from Trader Joes). I own shares of BRK-B. See my disclosure policy, which currently sells for $13.89.

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