As we go through life dispensing our hard-earned dollars for this and that, it's critical to look for good value. Many of us understand this and seek out bargains whenever we can. (Not a particular friend of mine, though, who once explained that his car's spiffy new tires cost twice as much as ordinary tires and lasted half as long.) We tell ourselves that we're looking for good values, but we may not always appreciate that value takes many forms. It's just not always obvious. It's not always a 99-cent burger or a $12,000 car.
Take food. A recent article at Salon.com profiled Ruth Reichl, former food critic for The New York Times and current editor of Gourmet magazine.
"At the same time, says Reichl, 'Masa is one of my favorite restaurants in the world.' She points (in the direction of) the neighboring sushi restaurant that costs around $500 a head. 'It's an extraordinary experience, and I'm thrilled that it's there, and I would gladly give up four meals in lesser restaurants to eat one meal there.' She pauses. 'On the other hand, when I put down my $500 for a meal, it worries me.' Reichl says that she has eaten at Masa twice, once with her son on his birthday, and once with her editor Ann Godoff, who was so moved by her meal that she 'burst into tears.' Seeing Godoff's reaction, 'I thought, "How could anyone say this is too expensive?"' Reichl says, especially in an atmosphere where people don't think nearly as hard about throwing $500 at a car or a watch or even a pair of shoes."
How true that is. Sometimes, a $500 meal can indeed be well worth it -- even a bargain. I've been lucky enough to dine a few times at some of New York City's finest dining establishments and found that the prices that initially seemed darn steep to me ended up seeming like bargains. (Especially the lunch prices.) I can still remember a tasting-menu dinner at Bouley, for example, and how even the parsley was amazing. A few years back, I enjoyed a terrific lunch at L'Arpege in Paris, where one of many memorable courses featured avocado and langoustine mousses atop a spoonful of caviar in a martini glass with pistachio oil. I can't remember many movies I've gone to see in my life and many doodads I've bought, but there are many meals I'll remember for a long time. They were well worth the price.
That paragraph above about Reichl can apply to stocks as well as to food. Too often, an investor will look at a stock that costs, say, $100 per share, and will think it's "too expensive," instead favoring a $10 stock, as it's "cheaper." Wrong, wrong, wrong. A $100 stock can be a bargain -- it may rise to $200 per share within a few years, perhaps splitting along the way. A $10 stock may also double in value, but just like any other stock, it may fall -- and keep falling. Penny stocks, those trading for $5 or less per share, are often extra-volatile. They're often trading at low levels for good reasons.
You can't draw many conclusions about a company from its stock price alone. You have to relate that price to other factors. Relate it to earnings per share, and voila -- you're looking at a P/E (price-to-earnings) ratio. Relate it to sales, and you've got a price-to-sales ratio. Crunch other numbers and relate them to the company's peers and competitors, and you'll start getting a feel for whether you're looking at a bargain.
As some extreme examples, consider the stock prices of Warren Buffett's company, Berkshire Hathaway
Value in context
Of course, there's more to investing and spending money intelligently than just finding bargains. Most of us can't afford too many $500 meals, worthwhile though they may be. We may find a bargain-priced trip to Paris, a beautiful fancy suit at half off, a terrific used car, and a two-for-one coupon to a nice restaurant. Those are all good deals, but sometimes it's smart to not take advantage of every good deal you find. (I have had trouble admitting this to myself as I, too, frequently grab inexpensive books, movies, and CDs at eBay's Half.com.)
Even with stocks, if you find 40 that are all trading at attractive prices, you probably shouldn't snap up shares of all of them. For one thing, you'll have trouble keeping up with them all. For another, you'll end up overdiversified, with your eggs spread out into too many baskets. If you can spend more time and effort and distill that list of 40 to your 10 most-attractive ideas, your portfolio will likely do much better, invested in a concentrated group of your most promising finds.
Value in your mailbox
But back to our friend the stock price. On its own, it's close to meaningless. A stock's real value, however, is critical. A stock may be trading at $10 or $40 per share, but at the same time, you or another stock analyst may determine that its true, intrinsic value is around $25 per share. Find a stock priced well below its real value, and you're looking at a very promising investment. Of course, finding such investments is much easier said than done.
Let us help you find great values. Our MotleyFoolInside Value newsletter, headed by Philip Durell, is chock-full of great value propositions, delivered directly to you each month. Last time I checked, 11 of his 16 recommendations had gained ground, a full nine of them by double digits -- and the newsletter isn't even a year old yet. Take advantage of a free trial of the newsletter, and you'll be able to see all of Philip's picks, including his latest ones. You'll also get to learn how he analyzes companies and seeks out terrific performers.
Here are some good Fool articles on value that can enlighten you further on value matters:
- Chuck Saletta's "Unlocking the Secrets of Value"
- Chuck Saletta's "Why Value Wins"
- Dave Meier's "Got Value?"
- Tom Gardner's "Save Your Portfolio"
- Philip Durell's "Beat the Street With Value"
- Rich Smith's "Buy When Wall Street Won't"
Longtime Fool contributor Selena Maranjian's favorite discussion boards include Book Club , Eclectic Library , and Card & Board Games . She owns shares of Berkshire Hathaway and The Washington Post. For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools .