What is the best metric to decide whether a stock is underpriced or overpriced?
Is it the price-to-earnings ratio? Is it book value?
To figure this out, US finance expert and buy-and-hold advocate Brian Feroldi urged his newsletter readers to consider the case of Susannah Mushatt Jones.
Jones died in May 2016 and reportedly ate four pieces of bacon every morning for more than 50 years.
"[It] won't shock you to learn that she had high blood pressure," said Feroldi.
"But this isn't a story about unhealthy eating habits. That's because Jones was born in 1899. Yes — she lived for over 116 years."
Image source: Getty Images
A single number that describes everything
Understandably, Jones' diet was the subject of much media attention when she died.
But the rest of her life was "unremarkable".
"Jones never smoked, never drank, slept for at least 10 hours per day, and surrounded herself with a supportive community," said Feroldi.
"Those factors, we believe, were the real 'secret' to her longevity (good genes probably helped, too)."
So what's the moral of the story?
"It's a mistake to reach a complex conclusion by focusing on a single metric," said Feroldi.
"Someone might be able to run a 5-minute mile, but what if their joints are degrading and they don't have any close friends?"
Another person may be slim and the right weight for their height, but they could be smoking and suffering digestive issues.
"Someone might be able to squat 500 pounds, but what if they use performance enhancing drugs and have anxiety?"
There are no shortcuts in investing
Feroldi believes that investors need to take the same attitude when deciding which companies to put money into.
Whether a stock price is cheap or expensive isn't a matter of just one simple metric.
"It sounds tempting to buy a company with a dividend yield of 6%," said Feroldi.
"But what if that same company hasn't grown its sales for 15 years, carries a mountain of debt, and has underperformed the S&P 500 for a decade (hello, AT&T Inc (NYSE: T))."
Every investor loves a shortcut.
But AT&T and Susannah Mushatt Jones remind us all that there is no simple single way of evaluating a company or a person.
"There's no replacement for taking a holistic view of the world around us."
Supposedly "cheap" companies can see their share price plunge 80%, and so-called "expensive" shares can later become 10-baggers.
Feroldi said that, rather than obsessing about whether a stock is underpriced or overpriced, it could be more productive to take a whole-company view of whether it is a quality business.
Then hold the stock for as long as it remains of high quality.
He did admit this is easier said than done.
"Consistently executing that strategy in the long run is one heck of a challenge," said Feroldi.
"That challenge only gets harder when you rely on a single metric to make valuation decisions. We encourage you to take a more holistic view instead."
