Monday, September 21, 2009

Ignore Stock Price, Focus on Value

Posted by: Matthew Maillet
Article by: Pat Dorsey

It's all too easy to think that a stock that has risen sharply is no longer a bargain -- or conversely that shares that have been cut in half must be a good deal. If only investing were that simple.

I learned this the hard way a few years ago. In the summer of 2006 I bought some MasterCard stock after the credit card company went public. In the first few months the shares moved up steadily, but then they rocketed from $70 to $90 in just a week's time. Since I was on an overseas business trip with little time for research, I reflexively sold a chunk of my holdings.

Dumb move. As it turned out, the company's profit margins were growing faster than I had anticipated -- boosting MasterCard's value -- and the shares topped out at $320 a couple of years later. If I had paid more attention to the value of the business, rather than the price of the stock, I might have held on.

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