Price Vs. Value
Plus, approaching the final oil round

by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (March 11, 1999) -- Hip hip... hooray! Hip hip... hooray!

Brian completed round one of our company-by-company oil study. If you missed it, be sure to visit this week's Tuesday and Wednesday column in the archives. Once you have, place your votes on our final two candidates: Marathon and Ashland.

It's a nail-biter. So far the votes are 50/50 for and against. If either company gets approved, it'll join the final analysis round with BP Amoco, Exxon-Mobil, and Pennzoil-Quaker State. Place your votes on this message board.

Price vs. Value
What is a cynic? A man who knows the price of
everything and the value of nothing.
--Oscar Wilde

The popular quote from Oscar Wilde is perfect when applied to Wise stock market gurus. You frequently hear on financial television and read in Wall Street publications that stocks are overvalued. You rarely hear the Wise hypothesize that stocks might be great bargains (as they were, it turns out, for all of this decade) or even reasonably priced. Instead, prices are quoted as high, scoffs and warnings are registered, the interview or article ends, and the investor is left alone to worry...

"Hmm... should I sell and hope for a 15% decline in the market before buying again?"

Doing so would be foolhardy, if not idiotic.

First, nobody can guess the market's direction. Second, if you sold you'd need to pay taxes of more than 15% on your gains and this could leave you with less money to buy back what you just sold.

Too many people know the price of everything and the value of nothing. How true this is of the typical market guru. Think about it in the following way:

Wise gurus often argue that stock prices are high in the present moment and issue warnings, but they never say, "If you'd bought 100 shares of this company 15 years ago, it'd be valued at over one million dollars now. And, dear investor, whatever stocks are priced at currently, if you sold now taxes would take a large chunk of your gains. Instead, if you hold this investment for another 15 years you might grow your total value to three million dollars."

They never say things like that, even though one of the most important points to be made about the stock market is hidden in that paragraph. It is this: value is created over many years. Current price, or valuation, is "of the moment." The two are much less related than you'd think.

Value is amassed by investing steadily for years. Valuation, or price, addresses the immediate. If you're investing in strong companies regularly, you will build value over 15 to 30 years whether you buy some shares at very "high" prices (according to whomever), and other shares at so-called reasonable prices. Many investors confuse the process of building value with the analysis of a stock's current price, however, and it paralyzes them.

Make sure that doesn't happen to you. Always act in the interest of creating long-term value. Seek great companies to begin using as "savings accounts" every month. That means that you don't react to a stock price as if you know where it's going in the near term. That's a game for the Wise: sell, buy, sell, buy! The bigger picture is that a stock's price might decline for a few years, but its value is going to be greater in 15 years if you invest well.

You should aim to reverse Wilde's quote. You should aim to know the value of everything and the price of nothing. A leading company is valuable to own and invest in for 15 years or longer. The price that you pay for a stock as you steadily invest is almost coincidental.

Using dollar-cost-averaging, you'll buy the same stock at many prices over several years. So within reason, the current valuation isn't very important to you as long as you find a moderately successful long-term investment. If you invest the same dollar amount each time, you'll always buy more stock when the price is lower, and less when it's higher. Over the years, your average price will favor the lower side of the stock's range. You'll have created value regardless of the prices you paid. That's a concept the Wise can never grasp.
[To discuss these columns, please visit the Drip Companies message board on the Web.]

Would you work for a bunch of Fools?

 Recent Drip Portfolio Headlines
  12/27/00  Eight Lessons from a Down Market
  12/26/00  Fools Share Their Blessings
  12/21/00  Amazon Dropped from Study
  12/20/00  Ciena's Not Like Other Telecoms
  12/19/00  They Say You Can't Invest
Drip Portfolio Archives »