The price of a stock doesn't matter
The stock market is filled with individuals who know the price of everything, but the value of nothing.
Before you read any further — if you’re bold, comment your answer below, and if you’re more private, answer this question to yourself:
Which stock is cheaper: BRK.A or SNAP?
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” —Phil Fisher
Price does not equal value.
Oftentimes, the price is the perceived value, but not the true, intrinsic value.
What even is “intrinsic value”?
There are varying definitions of intrinsic value, and countless ways to calculate it, but to put it simply, the intrinsic value is what a given asset or security is worth.
The price of a stock is the cost you must pay to acquire such an asset, whereas the intrinsic value is what that asset is actually worth.
Just because you pay $10 for a share of stock, does not mean that stock is worth $10 — it could be more, it could be less.
One of my favorite tests
When new investors begin investing in the stock market, they’re almost always focused on the price, not the value.
The price of a stock, by itself, is irrelevant.
It must be considered in relation to the underlying company’s value to have any context.
When I’m speaking with new investors, I love to use these two companies as examples: Berkshire Hathaway and Snap, Inc. I pull up a chart of both company's stocks and ask new investors, which company is cheaper?
Every single new investor that I have asked that question has said Snap is “cheaper”.
Their answer was driven by a price-bias. They can clearly see that one stock costs nearly $400,000 to purchase, while the other is under $60. If they were asked which stock costs less, you could argue their answer is correct. It does cost less to purchase a share of Snap than it does Berkshire’s A shares.
However, I would argue that Snap isn’t necessarily cheaper. When we talk about “cheapness”, we’re generally talking about the price in relation to the value. The value is what matters, not the price.
Price is irrelevant without consideration of the underlying value because of the way ownership in a company can be split.
Let’s think of an entire company as a pie, with each piece of the pie equaling a share of stock.
You can cut up your favorite apple pie into 5, 8, or 20 pieces, or really any number of pieces you want. However, no matter how many pieces you cut that pie into, you’re left with the same amount of pie. It’s the same with a company. The company can be split into as many “pieces”, think stock, as it’d like, but the value of the company doesn’t change.
Take a company worth $100. If you split it into 50 shares, each stock is worth $2 per share. However, if you split it into 5 shares, each stock is worth $20. In the second scenario, the stock costs $20 to buy, whereas it only costs $2 in the first scenario, but the value of the company is the same — only the price of the stock has changed.
As you move forward as an investor, I challenge you to remember and consider what Phil Fisher said, “The stock market is filled with individuals who know the price of everything, but the value of nothing.”
All the best,
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great quote, and I wasn't bold enough to comment but I chose correct
SNAP. No I will read and see if I was right!