I notice a theme whenever friends or family members ask my opinion about a company stock. They tend to ask me about a low quality company – because it usually comes with a low stock price.
For example, they’re more likely to ask me about Lumber Liquidators (NYSE: LL) because it’s $11 a share, not Home Depot (NYSE: HD) trading at $177. As our contributor Chris Pascale noted in his article last night, Lumber Liquidators’ stock is at a 10-year low after it was revealed in 2015 that the company had been selling toxic wood.
Or Bed Bath and Beyond (NASDAQ: BBBY) which is $14 and has been a disaster, and not Costco (NASDAQ: COST) which is $200 and thus far Amazon-proof.
I know that new investors may not have a great deal of money, so they shop for stocks like they shop for food at the supermarket. If you have $1000 to invest, it’s enticing to know that you can buy 70 shares of Bed Bath and Beyond instead of just 3 shares of Costco.
But buying stock is not like grocery shopping – not in the least! When it comes to investing, you certainly get what you pay for.
Costco is one of the best retailers in the world, and Bed Bath and Beyond is on life support.
Stock prices move in percentages, so you are not going to make more money in a lower priced stock. Just do the math.
A 5% move will make the same amount of money whether that money is invested in a $2 stock or a $200 stock. I can argue that you’ll probably make more money in the higher priced stock, because they tend to move in larger percentages due to the higher price.
And to quote Warren Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” You’re going to hold on to this company over the long term. Don’t you want it to be a quality business?
Please don’t get sucked in by low price. Buy high quality companies.
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