FEATURE — My mom loved root beer.
Before she passed away a year ago at age 93, she wanted a McDonald’s hamburger and a root beer. It was about that time that some of the kids and I stumbled upon a website that sold what they called, “Vintage Sodas.”
One of the collections they offered was a case of 24 different nostalgic root beers they guaranteed were sure to please. Looking through the advertisement we saw mostly names we had never heard of, made in boutique shops across the country. There were a couple I recognized from my youth and wondered what had happened to them.
We just couldn’t resist the temptation, so we ordered two cases and planned to have a root beer sampling party when they arrived.
In a few days, the boxes were at my door, and we excitedly opened them and began reading the odd names. We decided to put them in the fridge so that over the next couple weeks we could gradually give them a try. As we sat around the table and poured the first one a few days later there was excitement in the air.
As each person took a taste, a noticeable letdown filled the room. “Well, that wasn’t what I expected,” said one. “A little too much like caramel,” commented another. So, we brushed it off and decided to open another bottle. And going through a few more the comments were much the same.
Over the next few weeks of soda sampling, we realized that there really wasn’t much to get excited about. Sure, we still had fun with the little game, but we were disappointed to find that the best root beers by far were still the A&W and Mug versions we had already been drinking for years. Then one of my kids said something a bit profound: “No wonder they are called Vintage. They aren’t around anymore because they were never any good to begin with.” And we all laughed.
When individual investors are looking for a good stock pick they often ask my opinion. Many times they show me a stock that has been around for a long time but hasn’t been doing very well lately.
They say things like, “The price is way down so I can get it cheap.” On the other side, I might point out a great company or two that they might want to consider and I get a response something like, “Oh that stock price is way too high because everyone is buying it.” I wonder if they realize what it is that they are saying. So let me rephrase it, using the hypothetical example of two electronics companies.
Imagine that a potential investor says, “I don’t want to buy the company making those new high-tech cellphones. Everyone is buying their stock so it’s really expensive. Instead, I’m thinking of this company over here that sells AM radios. Their stock is super cheap.”
That may be an exaggeration, but my point is, the best real estate is usually the most expensive. The nicest cars are pricey and the best companies in today’s world are usually not the ones being heavily discounted on Wall Street. Now, none of this is always the case but it is generally true that if you want quality you will probably pay top dollar for it, and it will usually be worth it.
If you are looking for a bargain on Wall Street, just be aware that often stocks are really cheap, because that’s all they’re worth. And expensive companies may be pricey because they too are worth it.
Don’t buy a stock just because it’s cheap or avoid one solely because it appears expensive. The old saying, “You get what you pay for,” generally applies in investing as well.
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