The main reasons investors lose money in the stock market are not for lack of intelligence, but instead for lack of temperament. And nowhere is that lack more obvious than it is with stock prices. It sounds very elementary but even the smartest people have a hard time of separating a business from its stock price.
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Love the Company...
For years I have admired Whole Foods Markets (Nasdaq:WFMI). Their products are great, especially if you are big on healthy living. Over the years, the company has built itself up as the only game in town to dominate the natural foods industry. When it bought out rival competitor Wild Oats a couple years back, Whole Foods became the main contender in the space.
Even more impressive, Wal-Mart (NYSE:WMT) which has added organic and natural foods in its superstores has not been able to overthrow Whole Foods. That's extremely important considering that when Wal-Mart began to seriously sell things like electronics and toys, you end up with companies such as Toys "R" Us going private and CircuitCity going bankrupt. As well, the fact that companies like Wal-Mart and Kroger (NYSE:KR), have been beefing up their organic and natural foods department underscores the rising demand of those products.
...But I Have No Feelings For Stocks
As you might imagine, I have kept an eye on Whole Foods for a while. When I see one of their stores, I pop in, observe and eat. For years this company was the darling of Wall Street. The strong economy enabled the company to grow rapidly and as folks became more health sensitive, they supported businesses like Whole Foods.
As you might expect the stock was on a tear for many years. From January 2000 to January 2006, the stock price leapt from $11 a share to over $70. As it was reaching new highs, hedge funds piled in despite paying over 40 times earnings for the company. At the end of the company's 2006 fiscal year (ending September), Whole Foods earned $1.41 a share while the price hovered around $55 a share.
Nobody seemed to be able to step back and realize that Whole Foods, while a fantastic business, was not a fantastic investment at that price.
What About Now?
Fast forward to today and, not surprisingly, the economy has hurt Whole Foods since the company does peddle higher priced goods. But when the company reached it's lows of $7 a share with EPS expectations at $0.65, or a P/E of about 11, more people were selling shares as if this were some fly by night business. Now the stock is back near $20; I regret that I wasn't able to invest in the company back then, but rest assured if shares dip again, I'd welcome the chance to own this business for a very long time.
So much investing is done backwards. The best time to buy good businesses is when nobody wants them, like now. The key is to pay the right price. Price paid determines value received. Like Whole Foods, I love Chipotle (NYSE:CMG), but so does Mr. Market and it will cost you nearly 30 times earnings to own the company. Learn to separate the business from the stock price and your buying habits are likely to reward you. (For further reading, see Removing The Barriers To Successful Investing.)