Human Inequality Is Despicable, but Stock Discrimination on Wall Street Is a Good Thing

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Today here in the U.S. we celebrated Martin Luther King Jr. Day, and most Americans had the day off to commemorate Dr. King's impact on American history and human civil rights. Dr. King dreamed of a world in which all people were treated equally regardless of race, creed, color, or religion, and his life was tragically cut short before that dream could be fulfilled. We still struggle today with these same issues, and we should continue to strive for a world where human discrimination doesn't exist.

Most of us have a negative association with the word "discrimination," and when it comes to the treatment of human beings, that association is appropriate. But when it comes to our investments, a slightly different perspective may be in order.

On the stock market, we can find a number of instances in which stocks are discriminated against, both justly and unjustly. Sometimes a stock has been beaten down based on industry trends, or a because a competitor reported comparatively good or bad earnings figures. Irrational moves like this amount to discrimination against a stock that may never have done anything wrong, but smart investors can take advantage and pick up an unjustly mispriced stock at a bargain.

Likewise, inequality can take on a different meaning in terms of investing. Look at (NASDAQ: AMZN  ) or Tesla Motors (NASDAQ: TSLA  ) to see what I mean. Amazon never records a large profit, and that's because Jeff Bezos has made it clear from the start that most profits will be rolled back into the business. But because Amazon isn't treated like other companies in the retail world, the stock price, on a price-to-earnings basis, looks insane. It currently trades at a mind-boggling P/E ratio of 1,447,

Similarly with Tesla, if we base what the company's market capitalization should be on the number of vehicles it sells, then the stock is insanely overpriced. In 2013, Tesla sold just over 22,000 vehicles, yet the company is currently valued at over $20 billion. For comparison, Ford (NYSE: F  ) is believed to have sold more than 2.5 million vehicles in 2013 -- more than 100 times as much as Tesla -- yet its market cap is only a little more than three times as large, at $65 billion. This is a type of discrimination against Ford, in that investors believe Tesla will grow at a faster rate than the older car company. So you can make an argument that the stocks are being treated unequally, yet they're also being evaluated on their own merit, which is a good thing.

But there's one place where discrimination in investing is just as negative as in other parts of life, and that's on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . Because it's a price-weighted index, it doesn't give an accurate picture of what the markets really look like. Its highest-priced stock, Visa, currently trades at $232.18 and makes up 9.06% of the Dow, while its lowest-priced stock, Cisco Systems, trades at $22.74 and accounts for only 0.89% of the index's weight. Yet the two companies' market caps aren't that far apart -- $147 billion for Visa, and $121 billion for Cisco.

The Dow's methodology thus fails to evaluate stocks based on their own merit (i.e., market cap) and instead judges them by their superficial outward appearance (the share price, which is the first thing investors usually see but doesn't always tell you much about the company).

So while inequality and discrimination can sometimes be a good thing for investors, that's certainly not always the case -- and it's something we should never tolerate on a human basis. So let's take some time today to thank Dr. King and everyone else who's fought and sacrificed so much toward achieving that goal.

More Foolish insight
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2014, at 3:29 AM, Pixma25 wrote:

    22,000 x 10 is not 2.5 million. On a side note, comparing Tesla to Ford based on the # of vehicles sold is like comparing a jewelry store to a gumball machine that dispenses plastic 'bling'.

  • Report this Comment On January 21, 2014, at 10:05 AM, Ustauber wrote:


    Love your comment and surprised they posted

    Because if you make a comment against the article it would be deleted him.

  • Report this Comment On January 21, 2014, at 10:09 AM, Ustauber wrote:

    By him :(

  • Report this Comment On January 21, 2014, at 10:39 AM, MartyTheCanuck wrote:

    Inequality isn't discrimination. Discrimination is "despicable", inequality can result from a lot of things, including investing acumen that the Fool is trying to teach us.

    I agree that some stocks should be treated differently, when they have better growth prospects than others.

  • Report this Comment On January 21, 2014, at 12:51 PM, crca99 wrote:

    Are you stretching too far for holiday themed article? Companies are not people. Temporary negative publicity is not a life-time of being pushed down and out for superficial reasons.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2801571, ~/Articles/ArticleHandler.aspx, 9/3/2015 3:24:26 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt Thalman

Matt primarily covers the Dow Components, the Major Indexes daily moves, Consumer Goods stocks, and General Investing Topics.

Today's Market

updated Moments ago Sponsored by:
DOW 16,381.18 29.80 0.18%
S&P 500 1,953.67 4.81 0.25%
NASD 4,746.56 -3.42 -0.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 3:09 PM
^DJI $16382.21 Up +30.83 +0.19%
AMZN $507.01 Down -3.54 -0.69% CAPS Rating: ***
F $13.82 Down -0.05 -0.36%
Ford CAPS Rating: ****
TSLA $246.01 Down -1.69 -0.68%
Tesla Motors CAPS Rating: **