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Biggest Stock Market Tip

Stock Market Tip

Listen closely because this is the biggest tip you’ll ever get on investing in the stock market. This one tip is enough to make or break your fortunes! And fortunately for you most people don’t use it, even after they know about it.

What’s the amazing tip? It’s very simple in principle, actually it’s almost too simple. But before we get to it, let’s take a quick step back to look at how most people invest in the stock market right now. Read this before you skip to the tip, it will make it that much more poweful.

Imagine that I tell you a stock is worth $100. Is that good or bad? Is it expensive of not? What if we compared that stock to another $10 stock? Which is more expensive? Which is richer? In other words, which is more valuable?

I’m willing to wager that the majority of you will say the $100 stock is more valuable? Why is that? How do you know? Because the price is higher? And that’s where the problem lies!!! The price of a share of stock is a horrible measure of value. The price of one single share of stock is meaningless. Yes MEANINGLESS. It’s completely useless without a context.

Why? Because the price alone doesn’t tell you what percentage of the company you own. If you’re a little confused don’t worry, that’s why I’m going to give you a concrete example. Let’s take a look at two different companies

  • Company A has 1000 shares selling for $10 each. The total price of the company is $10,000.
  • Company B has 100 shares selling for $100 each. The total price of the company is $10,000.

In these two examples, owning $100 worth of shares of either company is equal. That is owning 10 shares of company A at $10/share is worth the same as owning 1 share of company B’s stock at $100.

Now this is an easy example, real life is more complex. The total market value is never the same, nor are the amounts of shares available or the price. To compound this, you have to remember that the total market value of a company is rarely equal to the real value of a company.

Intrinsic Value Versus Actual Value over time

So where does that leave us? We’ve covered that looking at the share price is a very bad indicator of value, but where’s the real tip? The real tip of today’s article, the biggest tip I can give you, is that when you buy stocks in a company you should pretend as though you’re buying the whole company, and not just a few shares. Pretend as though you’re buying a mom & pop store on the corner of the street, a coffee shop, whatever. The key is pretend as though you’re buying the whole company.

By doing this you’ll force yourself to look at the company as a whole. You won’t just look at an arbitrary stock price without any context, you’ll look at the real price to acquire the company. And yes the stock price is completely arbitrary, a company can issue a split (or reverse split) at any time. When this happens the stock price changes drastically, but the price of the full company doesn’t.

But if you think about it some more, it will make you look at buying stocks very differently, and this is the most important part of the tip. For example, you’ll not longer be looking at just the price of a stock, you’ll want to make sure it’s worth it. Would you buy a coffee shop losing a million a month? Yet many people buy stocks like this. Would you buy the coffee shop at 10x it’s current value, say for a million when you know it shouldn’t ever be more than $250,000? Happens all the time in the stock market. Not only that, you’ll want to do more research. As much as you would do when buying a coffee shop.

Another major shift in thinking will be your hold time, that is how long you plan on holding onto a stock before you will sell it. When you buy a coffee shop do you buy it with the hopes of selling it in a few days or weeks? Not likely. After all, if you’re going to spend all that time and effort into researching and acquiring it, you’ll make sure it’s a valuable asset for a longer time frame. Buying and selling stocks quickly will dramatically reduce you’re returns, more than you can imagine. It’s worth picking solid stocks, or should I say coffee shops now that you’re perspective is already changing.

This one tip, the tip of looking at buying a stock as a full company rather than as a single stock will dramatically shift your overall thinking. It’s a simple tip with profound impacts. And it’s from this different way of viewing stocks that your biggest gains will come from.



 
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Comments:

  •     Anthony
    · May 1st, 2008  · 9:28 am  · Permalink

    On your chart, the blue line seems to go back in time at some point…

  •     Stephane Grenier
    · May 1st, 2008  · 11:42 am  · Permalink

    Hi Anthony,

    You’re right, it’s not a perfect graph. It should always be going forward in time. I apologize for the error.

    I’d make the adjustment to it but this graph was made by someone else for me, I’m not very good with Vector graphics…

  •     Andy Brice
    · May 1st, 2008  · 2:43 pm  · Permalink

    >Company A has 1000 shares selling for $10 each. The total price of the company is $1000

    Shouldn’t that be $10,000? Also for company B.

  •     FollowSteph.com - Biggest Stock Market Tip - Part 2
    · May 1st, 2008  · 7:17 pm  · Permalink

    […] with someone who didn’t fully appreciate what I wrote about in yesterday’s post (Biggest Stock Market Tip), so I’m going to expand my original explanation with a better […]

  •     Steph
    · May 1st, 2008  · 7:19 pm  · Permalink

    Hi Andy,

    Yes, you’re absolutely right. Looks like I should have gotten more sleep before I published this post…

    I just made the adjustment to both Company A & B. Thanks for letting me know too.

  •     Greg
    · May 4th, 2008  · 8:07 am  · Permalink

    Great example with the coffee shop. These sorts of tips will make it harder on the rest of us to make easy money 🙂

  •     Steph
    · May 4th, 2008  · 3:48 pm  · Permalink

    Hi Greg,

    Thank you for the compliment on the coffee shop example.

    It’s funny you say that, one of my favorite sayings is “it took me 10 years to become an overnight success”. Most people don’t realize that it took a lot of effort, even when it looks like it was easy money 😉

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