That Stock is Too Expensive; Rebuking the Myth

I was a sophomore in high school and I was sitting in Algebra 2/Trig class and the topic of stocks came up. It was 1997 and that was when the stock market started its famous run-up that led to the bubble burst of 2000. A few kids in the class were talking to our teacher about stocks and he had said he had a few mutual funds and that was about it.

The teacher was also one of the coaches of one of our major high school sports, so one of the kids asked the obvious question: Do you own any Nike stock? I will never forget his response because he made the mistake of saying "No, it's too expensive."

But I don't want to single him out. He just happened to be the first person I ever heard say this and it always stuck with me. What does the word "expensive" really mean?  Is it an absolute term or is it subjective? Well, it is purely subjective, but so many people use it absolutely.

Now, I am sure my teacher could very well have known the earnings back then of Nike. But I doubt it since he was someone who invested in mutual funds, so he probably didn't want to have the in-depth analysis of his investments, which I don't blame him for. However, what he meant to say was "I can't buy as many shares as I would like because I don't feel I would have enough to justify being an investor" (I will get into this in another blog soon to follow).  

Whenever you are doing ANY investment, it is important to understand the value of what you are buying. Let me put it in our everyday consumer terms: would you rather buy a brand new Ferrari convertible for $40K or a brand new Nissan Versa for $30K? Well, if we used the terminology and logic that is commonly used erroneously, you would say "I want the Versa because it is 'less expensive.'" But that's clearly wrong, correct? That brand new Ferrari convertible probably sells for $250K and you are being offered the same car for $40K. The Nissan Versa sells for around $10K, so paying $30K for it is quite overpriced!

Look at Berskshire Hathaway Class A Shares: It is selling for 1.1x book value and is currently trading at $114,000 per share today, but 1.1x book is quite inexpensive based on historical book values. So remember, don't look at the nominal dollar amount for your investments. Look at the value of what you are buying. Value is how you determine "expensive" or "inexpensive," not the actual amount of dollars you need to spend to buy it.