Nobody wants to be an odd-lotter, buying a small number of shares, as there is much more self-esteem "power" in getting a large number of shares in a low-priced stock. But, putting ego aside, A) which is the smarter move? And B) is high-priced Franco-Nevada Mining Corporation (FN.TO) a buy?
A. For the benefit of total beginners, let us first define our terms. A corporation could be envisioned as a large block of real estate, or a pie. Let's assume a pie has been divided into four parts, each one representing 25%, just to keep the numbers nice and easy. Let's assume the entire pie, of four quarters, is worth $100, so each quadrant would be worth $25, and you bought one quadrant for that sum.
Suppose each quadrant were subsequently cut in half, so that there was now eight slices in the pie, each slice worth $12.50. Owning two slices at $12.50 is exactly the same as owning an entire quadrant of one slice at $25; even though the price of each new slice is lower, the net ownership is exactly the same 25%.
And so it is when a stock splits 2-for-1, you have doubled the amount of shares, but are left with exactly the same percentage of the pie. The price of the stock really has nothing to do with the percentage of ownership, as it is the percentage of ownership that counts rather than price.
The appropriate consideration is to focus on what you get for each slice of pie, either a percentage of a corporation's assets, or future earning and dividend power. Consequently, buying one share of a stock at $100 might be a better "value" than buying one-hundred shares at $1 - each situation costing $100.
Additionally, some beginners like a low-priced stock because they figure it couldn't go down as much as could a high-priced one, but this is also fallacious since it is the percentage decline that matters just as much as the percentage advance. In other words, regardless of the size of your investment, try to choose the course that would lead to the largest percentage increase in that capital.
Our Supervised List #1 features high-priced blue-chips, and while some of them have gone up many points, the actual percentage is not enormous. Nonetheless, Bankamerica in our Supervised List #1 only doubled, even though it rose over 60 points. It started out as a $60 stock, and an investment there would have risen 100%, which is an unusually high percentage advance for a blue-chip.
Supervised List #5 consists of low-priced stocks, which have done poorly recently, not only because this has been a blue-chip market, but also because of the Dines Rule of Gold Countertrend, whereby golds tend to move opposite the rest of the market. Lists #1 and #5 will often go in opposite directions. Furthermore, the Bre-X affair has decimated the low-priced golds on List #5. Bargain hunters should therefore focus on the depressed stocks in Supervised List #5, especially at a time like this, when so many signs of an important gold Bottom are emerging. A speculative stock at $3 that goes up one point advances 33.3%, although a one-point rise in a low-priced stock is more difficult to obtain than a one-point rise in a high-priced stock. Finally, the broker's commission on a high-priced stock is usually fewer dollars than the same amount invested in more shares of a low-priced stock.
| In conclusion, instead of worrying about whether to buy low-priced or high-priced stocks, concentrate on stocks that should go up, because no matter how many shares you own, it is still going to be the percentage rise that measures your profit. |
June 23, 1997
The Dines Letter
June 7, 1997 June 14, 1997
Back to Editorials
Copyright © 1997 vronsky and westerman
