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

Sometimes finding inequalities within the markets can mean a big payday.

Jan 20, 2014 at 8:00PM

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. 

Fool contributor Matt Thalman owns shares of, Ford, and Tesla Motors. The Motley Fool recommends and owns shares of, Ford, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers