Just because one company’s stock price is cheaper than another’s does not mean that the company is smaller or worth less. Personally I pay very little attention to the share price. I mean what does it really tell me when you think about it? Doesn’t tell me a damn thing about what the business is worth.

Let’s look at two real companies. WD- 40 Company. That little spray bottle of lubricant everyone has in their garage. The share price is 204.55 currently. Berkshire Hathaway’s B shares are 271.96. Berkshire is a conglomerate that owns many different companies. A holding company if you will. Now, what can you really infer from looking at these share prices? Not much. Sadly, people do it all the time. They know not what they say. Here are a few examples you hear during amateur hour..

“The shares are only 20 dollars they are dirt cheap!”

“The shares are 1000 dollars it’s way to expensive!”

“Im going to wait until after the stock splits and then buy it so it will be cheaper.”

These statements make no sense to the investor. They are the words of someone who doesn’t understand what they are doing. If you follow this line of reasoning you will surely get a poor result relative to the market over time. Moral of the story..understand what you own.

Unfortunately for some insane reason when a company gets broken up into tiny pieces and you have the ability to buy those little pieces every day, people lose sight of what they own and go bat shit crazy. Disco balls come down, cool lights start flashing and the booze starts flowing. Everyone is having a famously good time, then the morning after happens and everyone just wants to forget the bad decisions they made. Ahh the good old college days.

But we are investors right? We know what we own. We will have zero regrets! We look at each share as if it were the whole business. Warren Buffett famously said “investment is most intelligent when it’s most business like.”

A true investor would want to know the number of shares outstanding and the net earnings. Only then can we can start to paint the picture of what we are looking at.

• WD-40 Company
• 204.55 Share Price
• 13.6m Shares
• 2.79b Valuation
• 85.8m Pre-Tax Earnings
• Berkshire Hathaway
• 271.96 Class B Share Price
• 1.47m Shares (A & B)
• 597b Valuation
• 102b Pre-Tax Earnings

Now you have a much better preliminary picture of what you are analyzing. See the significance? (Berkshire has a unique capital structure with A & B shares. The A shares are roughly 400,000 a piece. For this reason they don’t have many shares outstanding.)

Knowing these numbers helps you to paint the picture of what you own. Comparing the share price alone we can reason they are similarly sized enterprises. However, Berkshire is over 200 times the size of The WD-40 Company. And while the share price implies that WD-40 is cheaper, Berkshire is much cheaper relative to the earnings of the company. You are getting much more bang for your buck with the more expensive stock. In fact WD-40’s price is 41 times earnings, while Berkshire’s is only 7.43 times. Clearly Berkshire is cheaper when you think about it like an investor. Price is what you pay, value is what you get.

An investor is concerned how the underlying business performs over time. Ask yourself, if I purchased the shares at the current price, what am I actually paying for the entire company? The whole point of investing your capital now is to ensure you get more back as you go along. How much will the company produce on a net basis relative to what I paid? Is that a satisfactory return? What’s my competition and is the company solvent? Most importantly, will the company deliver enough cash soon enough to make it a sensible investment relative to prevailing interest rates.

For example, If you could take much less risk on a 10 year government bond and get a higher return, why take on the risk of owning stock in a company where the return isn’t so certain?

Make sure it’s a satisfactory return relative to the purchase price of the entire enterprise. And understand the limitations of the per share price and what it tells you about valuation. Your future self will thank you.