When price matters (and when it doesn’t)

The price at which you buy a stock is probably the only aspect of an investment you can control — but don’t get hung up on that once you’re in

Iwrote last week about price in the context of shopping for groceries and big-ticket items, especially online. Knowing the price helps you to avoid dodgy deals, and ensures you have a good sense of what the things you consume cost.

This week I want to stay with price but focus on the investor.

The first point is the price you pay when buying a share. Here, price is everything, as it is the only part of the investment process you control (aside from what you’re buying). The future profits, dividends and share price action are totally beyond your control.

But the price you pay is in your control, and you need to exercise that control.

Avoid paying top price for stocks; even if they’re great stocks, they’re great investments only if you get them at a great price.

To illustrate this point, let’s use Nvidia. In late May the chipmaker updated the market about its prospects in artificial intelligence and the stock added 25% in a day, hitting a record high of almost $420. Sure, Nvidia is a great business with great potential, but by every metric that was an insane valuation.

The other side of the price equation is that once you have bought into an investment, the price you paid is meaningless. Yet far too often we focus on what we paid for a share.

Recently a reader sent an e-mail to me about a stock they held and wanted to sell, but it was 50% below their entry point and their question was when it would be back at the entry price so they could exit at break-even.

I totally get that losing money is not fun. But worrying about what you paid never works. Rather focus on issues such as valuation and future prospects.

Maybe the fundamentals have changed? If this is the case, and the change is for the worse, why hold a B-grade investment? Rather sell, and buy a quality one. Hanging on because you hate the loss leaves you with an investment of less potential, and it weakens your overall portfolio.

But remember, too, that price tells us only what the market thinks of the company; it tells us nothing about the actual profitability of the business.

Here again I refer to Nvidia. The stock was at almost $350 in late 2021 before the tech bear market of 2022 caused it to slump to a low of less than $110 a year later. Now, ignoring the price but focusing on the long-term prospects for the company would have made you hang on, and perhaps even buy more shares.

But if you were obsessed with the price you may have sold out and then missed the huge rally we’ve seen in 2023.

So yes, know the price you want to pay for a stock and be strict about that, even if it means waiting for it to reach the right level. But when you have bought, ignore the price and focus on the business and future prospects and never get stuck in a stock because you don’t want to take the loss.