Just a quick post that most experienced investors already know, but sometimes it doesn’t hurt to be reminded – and definitely something newbie investors always never think about. Our portfolio is fortunate enough to be invested in 3 companies that have a share price over $1000 (well, technically it was 3 until Intuitive Surgical announced it’s 3-for-1 split last year). The three (in order of when they passed the magic $1K threshold)?:
- Markel Corporation (MKL)
- Amazon.com Inc. (AMZN)
- Intuitive Surgical (ISRG)
Some must be thinking – wow! Owning a $1K stock…….isn’t that terribly expensive? If we just look at all our holdings that have an underlying equity behind it (i.e. no ETFs, mutual funds, preferred shares), you’ll see that the three above are sort of outliers (especially if ISRG is 3x at $1,295). Zoom in and we get a pretty nice distribution for companies with share prices in the $100-$300 range with Mercadolibre (MELI) sitting on it’s own around $400.
The first point is price isn’t as important as market capitalization. We’ve sort of touched on this when Mastercard (MA) did a 10-1 split – so whether a company sells for $1000 / share and has 10M shares is no different from another one that is $100 but has 100M shares ($1000 * 10M = $100 * 100M = $10B).
The second point adds more to the same market cap concept in picking individual stocks and not getting fooled by high (or low) prices. As an example, let’s say we have two options:
- Buy 1 share of Intuitive Surgical (ISRG) @ $1000 / share
- Buy 1000 shares of Maine Coon Cat Litter Inc. (SHIT) @ $1 / share
Company 1 (ISRG) is a robotic surgery manufacturer with the majority of sales in the US, but expanding internationally. Company 2 (SHIT) is a specialized local niche producer of organic cat litter for maine coon cats.
Novice investors are always tempted to fall into the trap because they typically don’t have much to invest. So, the trap is always to think, oh, if I buy a $1 stock, and it goes up 10%, and because I own a thousand shares, I’m going to make ton of money! But in our two scenarios, a 10% increase…….is the same in both cases
- SHIT: $1 * 1000 = $1000 * 10% = $100
- ISRG: $1000 * 1 = $1000 * 10% = $100
So now we know that a 10% bump is the same, the next thing to think about is which scenario is more likely to increase the share price by 10%?
- ISRG: $3B in annual revenue, growing at 18% year over year
- SHIT: $50K in annual revenue, flat for the past 5 years
or which is likely to go bankrupt first:
- ISRG: a $50B company
- SHIT: a $250K company
Now, the above example might be obvious, but it’s something I remember falling into early on, especially when having only <$5K to invest (anyone remember Nortel for $1?). So the next time someone gives you a tip on a nice penny stock, ask how great of a company it is, and if there’s a better opportunity out there (there likely is).
If there’s anything to gleam from the chart, it’s just how large some of the big names are – even a known name like Mastercard (MA) is less than a quarter the size of Apple (AAPL). I was even surprised myself to see that mini-Berkshire Markel (MKL) is truly a mini-mini Berkshire ($16B compared to $500B+!)
That’s not to say that you should only invest in mega large cap stocks – after all, it’s hard for a $900B company with $50B in earnings to grow at a double-digit pace (there’s only so much demand for cell phones world-wide). That’s the case of investing in mid-cap ($2B-$10B) and large-cap ($10+B) cap companies in the hope that they become the next Apple (AAPL) or Amazon (AMZN). Even tiny companies can provide an unexpected boost – Lumber Liquidators (LL) and Extendicare (EXE) sit below the $1B market cap line and we’ve had one good example (Sandvine) and one bad example (NeuLion) of playing with stocks below $500M.
At the end of the day, and the main point of this post (TL;DR):
- Don’t ever let the share price alone scare you from buying a great company
- Don’t ever feel like you’re obligated to buy 100 shares at a time (owning 10 shares of a great company is better than 10,000 shares of a bad one) and,
- Cheap crap is still crap