Quick Comment: 'Expensive' shares
Some time ago, I had a conversation with my ASX remisier based in Australia and I think some of his comments are worth sharing.
*Me refers to myself when I was speaking to him.
*Investssmart is also myself but from my point of view now.
Me: Good shares in Malaysia are expensive.
Remisier: What do you mean by expensive? When you say expensive, do you mean in absolute terms or in terms of valuation? When I say it is expensive, it normally means overvalued or fully valued. Some companies can trade at $30 but we still call them cheap.
Investssmart: This is very true. The word expensive should be used more carefully when talking about shares. The absolute value does not really count. A Mercedes for $100k is 'cheaper' than a Waja for $60k. It is the value that counts.
Me: Malaysians' perception is that the higher the share price is, the more it can drop.
Remisier: That happens all the time. It is important to remember that we should look at the movements in terms of percentage. If a $50 company can drop to $5, a $5 company can drop to 5c as well. The important thing is to fix the absolute amount you invest. Purchasing 100 shares in a $50 company is the same as purchasing 1000 shares in a $5 company. If both rise by 10%, you will still earn the same amount of $500 no matter which company you invest it.
Investssmart: We should not be put off by the share price. It is the valuation that we should worry about. The chances of IRIS to drop from 90c to 20c is higher than the chances of BKAWAN dropping from $7.80 to $2. But somehow, if you give investors just these two choices, many would rather invest in IRIS because they think it is 'cheaper'!
Remisier: Do you remember me recommending you Rio Tinto ($30), BHP ($15), Woodside ($20) and Cochlear ($25)? You did not purchase any either! Perhaps, this changed your view on 'expensive' stocks!
Investssmart: These four stocks have skyrocketed since his recommendation. They are now about $75, $30, $45 and $50 respectively. Never say that upside of highly priced shares are limited. There is no such thing. Upside of overvalued/expensive shares is limited but upside of highly priced shares is not. Although I did not purchase these shares, it was not because I was scared of the high prices. It was mainly because I did not have the strong confidence in the commodity bull and sadly, I was proven to be wrong. Could have made tonnes more from the ASX. Nevertheless, in a bull market, almost everything on the ASX rose.
Me: I did not buy those few but I still bought some highly priced ones. What would I be trading if I don't buy any highly priced shares? I don't remember you ever recommending me any penny stocks!
Remisier: Good stocks are normally highly priced because the demand for good stocks is very strong. Lowly priced shares are normally those that are speculative or not performing.
Investssmart: It is strange but true to a certain extent. Of course, it does not apply to all company shares.
Strange but could be true: I don't think it is a coincidence that most of the true blue chips throughout the world are trading at high prices. Most of these blue chips have been there for ages. It had to start off somewhere as a smaller company and it takes time to reach where it is today. If the company was trading at $1 ten years ago, it will probably trade at $10 today to be considered a top performer. Otherwise, it would not be considered a blue chip.
Fundamental based investors always look at companies that have excellent track records and therefore, end up investing in highly priced shares. That is because it is very rare that we can get such companies at low prices as share prices should have risen as companies perform well over the years. I doubt fundamental based investors would be interested in companies that trade at low prices over the last few years because that means that they probably do not have a good track record. Of course, this does not apply to all shares but I believe that it is true to a certain extent.
Conclusion: Do not look at how high the share price is. It is the valuation that counts.
*Me refers to myself when I was speaking to him.
*Investssmart is also myself but from my point of view now.
Me: Good shares in Malaysia are expensive.
Remisier: What do you mean by expensive? When you say expensive, do you mean in absolute terms or in terms of valuation? When I say it is expensive, it normally means overvalued or fully valued. Some companies can trade at $30 but we still call them cheap.
Investssmart: This is very true. The word expensive should be used more carefully when talking about shares. The absolute value does not really count. A Mercedes for $100k is 'cheaper' than a Waja for $60k. It is the value that counts.
Me: Malaysians' perception is that the higher the share price is, the more it can drop.
Remisier: That happens all the time. It is important to remember that we should look at the movements in terms of percentage. If a $50 company can drop to $5, a $5 company can drop to 5c as well. The important thing is to fix the absolute amount you invest. Purchasing 100 shares in a $50 company is the same as purchasing 1000 shares in a $5 company. If both rise by 10%, you will still earn the same amount of $500 no matter which company you invest it.
Investssmart: We should not be put off by the share price. It is the valuation that we should worry about. The chances of IRIS to drop from 90c to 20c is higher than the chances of BKAWAN dropping from $7.80 to $2. But somehow, if you give investors just these two choices, many would rather invest in IRIS because they think it is 'cheaper'!
Remisier: Do you remember me recommending you Rio Tinto ($30), BHP ($15), Woodside ($20) and Cochlear ($25)? You did not purchase any either! Perhaps, this changed your view on 'expensive' stocks!
Investssmart: These four stocks have skyrocketed since his recommendation. They are now about $75, $30, $45 and $50 respectively. Never say that upside of highly priced shares are limited. There is no such thing. Upside of overvalued/expensive shares is limited but upside of highly priced shares is not. Although I did not purchase these shares, it was not because I was scared of the high prices. It was mainly because I did not have the strong confidence in the commodity bull and sadly, I was proven to be wrong. Could have made tonnes more from the ASX. Nevertheless, in a bull market, almost everything on the ASX rose.
Me: I did not buy those few but I still bought some highly priced ones. What would I be trading if I don't buy any highly priced shares? I don't remember you ever recommending me any penny stocks!
Remisier: Good stocks are normally highly priced because the demand for good stocks is very strong. Lowly priced shares are normally those that are speculative or not performing.
Investssmart: It is strange but true to a certain extent. Of course, it does not apply to all company shares.
Strange but could be true: I don't think it is a coincidence that most of the true blue chips throughout the world are trading at high prices. Most of these blue chips have been there for ages. It had to start off somewhere as a smaller company and it takes time to reach where it is today. If the company was trading at $1 ten years ago, it will probably trade at $10 today to be considered a top performer. Otherwise, it would not be considered a blue chip.
Fundamental based investors always look at companies that have excellent track records and therefore, end up investing in highly priced shares. That is because it is very rare that we can get such companies at low prices as share prices should have risen as companies perform well over the years. I doubt fundamental based investors would be interested in companies that trade at low prices over the last few years because that means that they probably do not have a good track record. Of course, this does not apply to all shares but I believe that it is true to a certain extent.
Conclusion: Do not look at how high the share price is. It is the valuation that counts.
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