The current big market news has not, in my opinion, been the return to record levels but the way in which those levels have been attained. Many businesses are still languishing while market indexes have been pushed up largely by the meteoric rise of a relative handful of high-tech companies. I feel this is creating a potential risk to investors.
Years ago, stocks were generally bought in lots of 100 shares each. Trading took time and was relatively costly, giving investors an incentive to carefully value what they were buying. If the stock price got too high it was common for the company to split the stock, thus reducing the total price so the stock would remain affordable to a wider group of investors.
Today we no longer buy stock in 100 share lots. In fact, investors can now purchase fractional shares of stock, spending as little as $1 per trade to own the world’s largest companies. They do so using mobile-based brokerage firms that don’t charge trading fees. (These firms don’t actually work for free, but the investor sees no trading cost.) This technology is very popular among young investors, even those still in high school. As I have thought about these new investors it has occurred to me that in many cases, they are looking less at the fundamental value of the companies they are buying and focusing more on what they perceive as the constant upward price movement of the stock.
You might remember the crypto currency craze of a few years ago. My teenage son asked me to explain how Bitcoin worked, and if I thought it was a good investment. He told me all his friends were buying and selling Bitcoin and he seemed to think they were making lots of money. I’m pretty sure most of those kids didn’t spend a lot of time considering the true value of what they were buying. They just knew the price kept going up.
Today when I see the seemingly uncontrolled rise in the price of some tech stocks, companies whose products are very popular with young people, I wonder if we might be seeing a bit of a repeat of the crypto currency craze. It’s almost as if these free trading programs allow them to use stocks as an alternative currency. If so, that would mean they care less about the real value of the company and more about their perception that the stock price will just keep going up.
If I am correct, then this is an area where investors should proceed with extra caution. I am a huge believer in the high-tech industry. Everything in our life is becoming automated and the trend will continue. But I am also a believer that revenue matters and profits matter, and eventually all stocks usually return to some reasonable form of valuation. Just because a company has a great product and a great future doesn’t mean the company has infinite value. Don’t get sucked into thinking it does.
Dan Wyson, CFP® is author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.
This article originally appeared on St. George Spectrum & Daily News: Is high-flying tech justified?