My thoughts on your conundrum:
Now, let's say I buy stock in Company A, a virtuous, upstanding, debt-free and profitable company that does everything "right." But Company A lacks "charisma." It produces a boring, if necessary product -- baby diapers, let's say. It does not turn investors on, and so its price appreciates relatively slowly.
Meanwhile, Joe buys stock in Company B, a wastrel company, one that gobbles up cash like there is no tomorrow, with a promising future but a present lived just one jump ahead of the bill collector. Company B is involved in producing some fantastic new technology that nobody really understands but that everybody thinks will crack all the secrets of the universe. So, its price increases by leaps and bounds.
First of all, Company A was a successful investment, so what Company B did is irrelevant. Second, if Company B appreciated 200%, it is probable that Company B's chances of solving all the secrets of the universe are a lot better this year than they were last year. Either that or a lot more people are realizing now what Joe knew before. Either way, it seems to me that Joe made an intelligent decision. And think of the discounted cash flows if these people are right? It would probably be easier to justify buying Company B than it would be in my justification in buying CSCO!
One thing I hold dear, even though in trying times I tend to question: The market, though not efficient, is much, much more efficient than almost anyone gives it credit for. I get into a lot of disagreements with some very intelligent people over this, but in the end I use it as the basis for a lot of what I believe in.
By the end of the year, Company A's price has gone up by 25%; Company B's has gone up by 200%. Joe and I both have to sell our stock, to put our kids through college, say. our dentist bills, say. Whose kid is going to go to Harvard, and whose is going to go to Ho-Hum State College?
Otherwise put: wshich one of us made the wiser investment?
Hey, that's easy to say with 20/20 hindsight. Look at the issue ex ante instead. You put your money into a low risk stock, and it performs very, very well. (I know this sounds absurd nowadays, but 20% is a great investment). YOu also had limited downside. Worst case scenario, your kid goes to community college. It worked out well, so your kid can go to State U.
Now look at your buddy. He took a lot more risk. It worked out, so his kid gets to go to Harvard. But let's say it doesn't work out. Let's say he picked 15 Jan 2000 to buy his hundred shares of RHAT at 140. His kid isn't going to Harvard, his kid is washing dishes. Risk/reward. Was it wise for him to jeopardize a college fund just for a shot at going to Harvard? Or would it have been more prudent to make sure his kid had a shot at State U? (Well, I guess it depends on how important you think an education at Harvard is. Now if you had used Duke in your example instead of Harvard, well, then, I would say roll the dice. Then again, I am slightly biased.)
In the no-dividend world, isn't the proof in the pudding -- that is, in stock appreciation? We may think that the stock of Company A should have appreciated more than that of Company B, but the fact is that it did not.
Coulda, shoulda. People who have been investing for only a short while have only experienced the reward side of the equation. March and April have only begun to introduce the risk side. Making a lot of money is great, but making a lot of money while minimizing the risk is even better. In your example, if we assumed that Company B was 50x as risky as Company A, I would argue that you made the wiser investment.
Think in the extreme. Your Aunt Sadie puts every penny of her retirement into lottery tickets, all of them with a one in a billion chance of winning one hundred million dollars. Bad move, we would all say, right? What happens if one of those tickets is the $100mm winner? Does that all of a sudden mean she made a wise investment? |
