Launa and I were in Dallas looking for a great barbeque restaurant on a busy Friday night. We drove to one that had been highly recommended and found the waiting room crowded with hungry guests. We noticed however, a beautiful barbeque place right across the street that only had a few customers in it. Not wanting to wait in a long line, we went across the street and were immediately seated for what turned out to be a very disappointing Texas meal. I’m a bit embarrassed to admit this was not the first time we had used this same criterion for picking a restaurant. In retrospect, why would anyone choose a restaurant based on no one else wanting to eat there? I’m pretty sure many of my readers are now nodding their heads, having done the same thing. We have since learned a great meal is usually worth waiting for, and worth paying for.
Investors often make investment decisions using the same flawed thinking. At a time like now when the broad stock markets have been on a short downturn, many investors are being tempted to buy for the wrong reasons. They say, “Look how cheap this stock is. I must buy it.” And by “cheap” they mean less expensive than it was a few months ago. I remind them that just because a stock that was trading at $100 last month is selling for $50 today, it does not necessarily mean that it is “cheap” in the sense of being a good value. Stocks decline because more investors are selling them than buying them. In a sense, a falling stock is a restaurant that, at least for today, few want to eat at.
Certainly, there are many reasons a stocks’ price may be down, and some of those reasons may represent a buying opportunity. My point here is that you should never consider a stock as being a great buy “Solely” because its price has come down. The converse is also true. When a stocks’ price seems high relative to recent history many assume it’s too expensive to be worth buying. They forget that like a great restaurant, the fact that there is a long line at the door may actually be a good sign of value, and something worth waiting for – or paying more for.
Cheap and expensive are relative terms as it relates to stocks. When stocks fall the low price can be tempting. When they soar they can seem expensive. Never let the size of the “crowd” surrounding or avoiding a stock be the sole reason for your decision. Some of the worlds’ most famous investors make their living seeking out the best “restaurants” so to speak, in the stock market. They understand they may pay more, and it may take more time to get the great meal, but they consider it worth waiting for. And if a stock is cheap because few want it, there may be a good reason for you to avoid it too.
Dan Wyson, CFP® is author of “The Gold Egg,”and “21 Financial Myths” and owner of Wyson Financial 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor