Here’s a question:

I have two stocks: Stock A and Stock B. As I write, their current stock prices are as followed:


Stock A – RM 0.67

Stock B – RM 5.42

Which of the two stocks is cheaper?


If you say ‘Stock A’ is cheaper, pardon me. You might be mistaken.


Perhaps, you may ask: ‘So Ian, does it mean Stock B is cheaper than Stock A?’

My reply is: ‘You can’t tell whether if a stock is cheap or expensive by looking at its stock price alone. By itself, stock price tells you very little about a stock. Hence, I believe, you can’t really make a wise investment decision based solely on looking at stock prices.’

Revealing the #1 Mistake in Stock Investing

Regrettably, as I write, the first thing that most people do when ‘investing’ in the stock market is: ‘To look at Stock Prices’.

That is the #1 Mistake made when attempting to make money in stocks. This has caused many to buy expensive stocks, believing that they are cheap. They were, unfortunately, being misled.

In fact, savvy investors would do the opposite from most people which is: To look at Stock Prices Last.’


Most People: Look at Stock Prices First

Savvy Investors: Look at Stock Prices Last


‘If I don’t look at stock prices first, then, what do I look for?’

The answer is: ‘Stock Profits.’

As quoted by Robert T. Kiyosaki, the Best-Selling Author of ‘Rich Dad, Poor Dad’, assets put cash into our pockets and liabilities take cash away from our pocket. Hence, the rich invests in assets that generate cash flow.

Thus, a savvy investor is one that knows how to determine which stock is an asset and which is a liability. Stocks that grow profits consistently are treated as great assets as they make savvy investors richer and richer. Meanwhile, the ones that don’t are dismissed as their ability to generate profits and cash flow are relatively weaker. Often, they are stocks that had reported inconsistent or decline in profits or worse, incur losses (a liability).


Golden Nugget:

Savvy Investors Look at Stock Profits First


What’s Next?

If a stock has built a track record of growing profits consistently, then, savvy investors would look into its stock price to assess whether its current price is cheap or expensive.

From two stocks above, let me give you more information:


Stock A

– Stock Price: RM 0.67

– Earnings per Share: RM 0.01


Stock B

– Stock Price: RM 5.42

– Earnings per Share: RM 0.44


Now, which of the two stocks is cheaper?

For me, I would say ‘Stock B’ is cheaper than ‘Stock A’. Why? This is because, for Stock A, I need to invest RM 67.00 to make RM 1 in earnings as Stock A’s P/E Ratio is 67.00. Meanwhile, for Stock B, I need to invest RM 12.32 to make RM 1 in earnings as Stock B’s P/E Ratio is 12.32.


Stock A’s P/E Ratio

= Stock Price / Earnings per Share

= RM 0.67 / RM 0.01

= 67.0


Stock B’s P/E Ratio

= Stock Price / Earnings per Share

= RM 5.42 / RM 0.44

= 12.32


Golden Nugget:

Use P/E Ratio to Tell Whether a Stock is Cheap or Expensive


The Verdict

Hence, do not get the two mixed up: Value and Affordability. In this case, we can say that:


Stock A is more Affordable but is Expensive. .

Stock B is less Affordable but is Cheap.


Happy Investing ….

Stock 101 Quiz

Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with Co-Founded, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

    1 Response to "Are You Buying Expensive Stocks Thinking They are Cheap?"

    • Naziman Azlye

      Thanks for this post. I think this is same what Buffett said “Price is what you pay, Value is what you get”

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