Are You Paying Too Much for Stocks?
Taylor buys a new smartphone for $150. But the retail price of this phone is $100. Why would Taylor buy a phone for 50 more than the retail value?
Buying stocks at a higher price than their value happens all the time in the stock market, and if you’re uncertain of what you’re doing when you’re investing, it could happen to you.
Buying a stock means that you own a share of a company. And a company is worth something. Think about the buildings, inventory, machines – the cash they have - and many other assets. Imagine if you had to buy that entire company today, what would it cost? A value investor wants to know what the company is worth – the intrinsic value - and then we want to know the company value per share.
That sounds like quite a large task, right? To add up all the company’s assets to find out what your earnings would be – the owner’s earnings. But it’s not really when you have the right tools and an understanding of what you have to add up.
When I started investing, I didn’t know this or think about this at all, but it makes sense, right – that the stock is linked to a company and that company must be worth something. In the past I wouldn't have known where to start. But it turns out that like many things that might seem big to overcome – once you learn it turns out it’s really quite simple. And that's why I'm so passionate about teaching this method - it's simple and it works.
Once you educate yourself, you also come to the realization that there are very popular businesses out there that have no value! Yes, despite of machines, buildings etc. they have debt, or they haven’t enough sales of goods to be profitable. Looking at the stock price in your brokerage account won’t tell you, what the business is worth.
A company like NIO that is mentioned on many social media platforms has so much debt it would take them more than 10 years to pay it off. And the return on the money they invest in their future is not coming back with a return (in investing lingo this is called ROIC). It’s -16%. It’s too unpredictable what will happen in the future because the company is so young. Is that something you want to bet your hard earned money on? Or do you want to reduce your risk by understanding the business that you're investing your savings in is a thriving and profitable business?
In my 5-week investing course I have tools that are easy to use to calculate the value of a company as well as finding a company’s margin of safety price, so you can find the exact stock price that you should buy a stock for. This way you don’t pay 150 for something that’s worth 100.
Education can help you make confident investing decisions.
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