Lower Priced Stocks Don’t Double Faster!
I cringe every time I hear a novice or even a long time investor tell me that they only purchase low priced stocks because they offer quicker potential gains. A common phase I hear is:
“I like to buy $1 and $2 stocks because they can double easily and I can afford them”
You can afford them? To start, a $1,000 account is a joke but to actually say the above statement and believe what you are saying after thinking about it is insane. A 50% gain is a 50% gain regardless of how many shares are in your portfolio. So, should you be buying 100 shares of SIRI because you love Howard Stern and can “afford it” or should you be buying Apple (AAPL) because you love it as it crosses $100, $150 and $200 per share? The novice says they can’t afford a $200 stock. Please smack yourself because you can afford it but in your mind, you can’t afford a nice round lot purchase of 100 shares (who cares, you’re trading small to begin with – making money is your only concern). One share or one hundred shares: a gain is a gain and a loss is a loss.
I rather own 15 shares of Apple than 100 shares of Sirius or a similar beaten down piece of garbage. I could care less about the number of shares in my account.
I care about making money – MY PERCENTAGE GAIN AT THE END OF THE YEAR!
Hell, I would’ve bought one share of Berkshire Hathaway at $100,000 before I would consider much of the hopeless crap treading along the bottom of the market’s ocean.
“Stocks are priced low for a reason, just as stocks priced high are there for a reason”.
Like anything in life, quality is never offered at a discount. In most cases, life offers its best material possessions at premiums.
A $1.00 stock is trading this low because it is only worth this much in investor’s eyes. A stock priced at $100 or $200 is trading at these levels because of a quality that the lower priced stock does not have (in most cases). Institutions, such as mutual funds, banks and insurance companies will not purchase a stock at $1 based on strict internal rules and fund guidelines.
Stocks such as First Solar (FSLR) move quicker than dirt cheap crap due to the vast amounts of support from institutions that have the buying power to propel prices 100%, 200% or more in less than 12 months.
- Apple (AAPL) is up almost 300% in eighteen months
- First Solar (FSLR) is up almost 900% over the past 13 months
- Baidu.com (BIDU) is up almost 400% over the past 18 months
- MasterCard (MA) is up almost 400% over the past 18 months
- Research in Motion (RIMM) was up almost 500% over the past 18 months
- Garmin (GRMN) is up almost 300% over the past two years
- Petrochina (PTR) was up more than 200% over the past 2 years
- Mcdermott (MDR) is up more than 300% over the past two years
- Google (GOOG) has doubled over the past year or so
The stocks above were trading at these prices June 1, 2006 (pre split adjusted):
- AAPL: $62.17
- FSLR: $27.89 (12/1/06)
- BIDU: $83.43
- MA: $47.51
- RIMM: $65.91
- GRMN: $97.12
- PTR: $106.45
- MDR: $44.84
- GOOG: $382.62
So, would you rather own low priced media mentioned stocks such as SIRI ($4.51 on 6/1/06 and $3.50 today) or the higher priced $40, $50, $60, $100, $200 and $300 priced stocks above. I’ll take the 300%, 400%, 500% and 900% gains of the higher priced stocks over the losses or minor gains from the lower priced options.
A quick study of stock market history will prove that the majority of stocks priced at $2 or less will be de-listed or bankrupt before they ever give an investor a triple digit return. High quality stocks are typically representative of high quality companies that usually have innovative products or services that are increasing revenues and earnings thus peaking institutional interest. You have all watched more stocks double or triple from the $25-$100 range on this blog than any other price level during the past year (chrisperruna.com is one year old this month).
I bought BIDU at $103, MA at $107, FSLR at $101 and AAPL at $130 this year alone (I rounded the cents). How many sub $5 stocks did I buy this year? NONE!
A stock going up 25% in one month’s time is the same whether it is from $5 to $6.25 or $300 to $375. It happens every year. The novice investor is usually hesitant to buy a stock that is priced at $50 or more as it looks too expensive to the untrained eye. What’s expensive to an uneducated investor may be a bargain to an educated investor.
Always buy the stock that presents the highest probability of success based on both fundamental and technical analysis. The price should never matter nor should the lot size. A 25% gain will always be the same whether you buy a $2 stock with 5000 shares or a $100 stock with 100 shares.
Think about this very basic example:
If you buy a $2 stock and it gains $1 in two months, you now have a 50% gain. But, if the stock falls $1 in two weeks, you now have a huge 50% loss in your portfolio, a number that usually devastates most traders.
If you buy a $60 stock and it gains $30 in two months, you will have a 50% gain. Now, if the stock starts to fall rapidly and is down $10 in a few days, you still have a chance to sell the stock within 10% of your purchase price and prevent further loss and devastation to your portfolio. You, the investor will most likely be able to spot negative action or red flags and get out prior to the sudden 50% drop that the lower priced stock could blindside you with.
Don’t buy a stock based on low prices or quantity of shares. Always buy a stock based on actual quality using both fundamental and technical analysis.