Doc's note: If you don't get in at the ground floor with a company, it's easy to feel like you've missed out on the best time to invest.
But as my colleague Whitney Tilson explains, that could be one of the worst mistakes for you to make...
The common cliché on Wall Street is that the four most dangerous words in investing are, "This time is different"...
But I've found a three-word phrase that's uttered just as frequently... and is arguably even more dangerous:
"I missed it."
You've probably grumbled these words to yourself before, as you passed on a stock you were considering buying... and then watched as it marched to new high after new high.
The critical lesson here is that just because a stock has run up a lot, that doesn't necessarily mean it's too late to buy.
Today, I'll show you why this simple, three-word phrase can be so misleading...
Look Beyond the Bargain Bin
In my decades as a value investor, I've seen it time and time again.
Value investors like me tend to look in the bargain bin for beaten-up stocks that are trading at 52-week (if not multiyear) lows. They get a sense of satisfaction from getting a better deal than the guy who bought it a month or a year ago.
It's a great strategy if – and this is a big if – you can correctly identify companies whose fundamentals eventually turn around. The key here is to avoid value traps: the companies that never turn around, whose businesses (and stocks) keep declining and declining...
But what about stocks that never really fall out of favor such that they end up in the bargain bin? Value investors often miss them.
Take Alphabet (GOOGL), for example...
In August 2004, the company went public at a split-adjusted $2.51 per share. By October, the price had already more than doubled. A year later, it had doubled again. And two years after that – in October 2007 – shares were trading at $18. Now, they're up to around $360.
Sure, it would be great to have bought shares right at the initial public offering. You'd be sitting on gains of roughly 14,230% today. But even if you didn't buy on day one, you didn't miss it.
Heck, if you had sucked your thumb for a year, watched the stock go up more than 260%, and bought shares in October 2005, you still could have doubled your money in only two years...
If you made this mistake, well, join the crowd. I watched Alphabet's shares continue to go higher and higher.
It would be one thing if I had done the work on it and concluded that it was outside my circle of competence (it wasn't) or was too expensive (it wasn't).
But that wasn't the case. I simply didn't do the work. Why? It wasn't because I was lazy. Rather, every time I looked at the stock, it was usually trading at or near an all-time high, so I kept telling myself, "I missed it," and moved on.
If I had just bought what I knew was a great business at any of those points, I'd be sitting on a multibagger today...
Let me give you another example. My friend Chris Stavrou, who ran a small hedge fund called Stavrou Partners for decades, bought shares of Warren Buffett's Berkshire Hathaway (BRK-A) back when he was a stockbroker in the 1970s.
Chris started buying it for his clients around $400 a share, even after it had risen more than 2,000% over the previous decade, because he didn't fall into the "I missed it" trap.
A decade later, he opened up his own hedge fund. By then, Berkshire was trading at an all-time high of $1,800 per share.
So did he say to himself, "Wow, this stock has moved up a lot – I think I'll wait for a pullback," or "Drat, I missed it"?
No. He saw that it was a great company run by a brilliant investor, and the stock was still attractive at $1,800. So he bought it for his nascent fund...
Today, BRK-A shares are each valued at well over $700,000!
So learn this lesson well: Whether a stock is trading at a 10-year low or a 10-year high tells you absolutely nothing about whether it's cheap or expensive.
Though I sold it much too soon, I was smart enough to buy Apple (AAPL) when it traded for a split-adjusted $0.35 per share back in October 2000...
In the years that followed, Apple rolled out the iPod music player, iPhone smartphone, iPad tablet, Apple Watch smart device, AirPods headphones, and more.
It's no wonder Apple has been one of the best-performing stocks of all time. It was a rare chance to buy a world-class stock before it rose more than 100,000%... enough to turn every $2,000 stakeholder into a millionaire.
Some stocks trading at multiyear lows are horrible value traps that are headed to zero. And some stocks trading at multiyear highs are going to be spectacular winners going forward.
The lesson here is, don't fall into the "I missed it" trap...
Ignore where the stock price has been, do the work, and make a rational decision based on your assessment of where the stock is likely to go in the future.
Good investing,
Whitney Tilson
Editor's note: With SpaceX's IPO last week, investors were rushing to make sure they didn't miss out. But Whitney believes that a financial rule change – that took place just before the SpaceX IPO – is a flagrant attempt to "harvest" more than $30 trillion sitting in retirement and investment accounts.
And it's set to begin on Monday, July 6.
That's why Whitney has called for an all-hands emergency briefing tomorrow at 1 p.m. Eastern time. Click here to make sure you don't miss it.
