When many people learn that we are in the Wealth Management business, they inevitably feel the urge to ask about a stock that they are interested in or has been recommended to them. For example, “I’m thinking about buying Apple stock because I love the iPhone, iPad and continual cutting edge technology. Who could live without Apple?”. Or, “I just bought shares of Tesla because they are awesome cars and the innovations they are planning in the next few years can’t be matched”. Our question back to them is always the same, these may be great companies but what is the price of the stock compared to what it is worth? If you don’t know what a stock should be worth, are you giving yourself the best chance to succeed?
In just about every other aspect of our lives, we are very aware of what things are worth. If someone told you that the best steak you have had in your life was for sale at the local butcher for $5000 would you jump at the chance to buy it? If someone offered you a 1000 square foot bungalow on a small lot in Vancouver for $100 million dollars, would you consider that a good investment? OK, we are in Vancouver so maybe that is a bad example but you get the point. The natural emotional response when buying a stock is the exact opposite to many of our other buying decisions. We feel better buying a stock that has done well and is expensive, rather than a stock that has gone down and may be on sale.
The bottom line is that good businesses are not necessarily good stocks and that can sometimes drive even the most seasoned investor crazy. Buying good businesses at good prices is very difficult. In times where the markets are moving up and down quickly, we always try to remember one thing.
Volatility is the friend of an investor who knows the value of a business and the enemy of those who don’t.
It is often only when the market corrects that the price is right!