Some advice is priceless
Basic concept: Opinions are useful only if they are properly anchored to a price
This note is part of the Pier Review reference material.
Much of what you hear and read is nonsense. Here's how to spot it.
Apple is a marvellous business. Its phones are way better than any competitor's. I think you should buy shares in the company.
This remark, and others equivalent to it, are to be found everywhere, in offices, bars, and even the financial columns of newspapers: anywhere where people with even a passing interest in business congregate. The focus is not just Apple, but pretty much every company, with suggestions either that the shares should be grabbed with all haste, or that they are toxic and should be sold quickly.
Whether it’s likely to be fruitful to -buy a share in a company depends on the price. If shares in Apple can be obtained for $1 each, you should certainly buy them. If, on the other hand, they can only be had for $1,000,000 each, you should certainly not buy them. There is not the faintest chance that Apple can generate enough wealth to return and reward money placed in it on that scale.
And yet the opening remark made no mention of price. It would be just as true if the share price was $1 or $1m. It's nonsense.
Because they don't mention a price, I call opinions such as these priceless. Normally, when we say that advice is priceless, we mean that it is extremely valuable. When I use the word, I mean the opposite. Opinions that are priceless have no value at all.
And yet it's surprising how often educated people offer priceless opinions. Financial journalists will tell you about the difficulties of a well known firm, and urge you to sell the shares, without even the simplest consideration of the maths involved. Sometimes there is literally no number in the analysis at all. At other times, there may be a dividend yield, or a P/E ratio. That's not enough.
The main mission of Pier Analysis is to eliminate priceless opinions from the minds of its audience, and to allow them to spoth priceless opinions in the mouths of others.
It's worth understanding what a priceless opinion actually amounts to. It's saying:
There are thousands of investors, a portion of them extremely well trained, and some of them paid to do nothing but look at this company and a very small number of other similar companies. The share price is the result of them voting with their orders to buy and sell holdings in this business.
Whatever the resulting price is - and I don't know what it is, because I have made no mention of it - it's wrong. The actual share price should be higher (or lower).
I know, because I can sense that whatever the collective opinion is of these people, busy setting the price with their trading, that opinion lacks some insight that I have as a result of my daily contact with this business.
Remember, the people setting the price are risking real money. Those offering priceless opinions are rarely doing the same.
Your default assumption should be that you have no edge
It is possible that to have an understanding about a company and its products that isn’t widely appreciated. This isn’t necessarily inside information: the company can be making strenuous efforts to explain the benefits its products offer to anyone who will listen, but you happen to appreciate the implications sooner than most people because of the field you work in.
An example would be the video conferencing software Zoom. Early adopters recognised that it worked noticeably better than established competitors years before it became wildly popular during the Covid confinement, and did nothing untoward if they acted on that conviction.
In most cases, however, you are most unlikely to have any advantage. You and I certainly have no distinctive insight when it comes to the plans of Apple, a famously secretive company.
If you don't know anything else about a business, your first instinct should be that all the news that's relevant is already captured by the share price. In particular, it's possible for a business in difficulties to be a perfectly good investment, because the difficulties are already reflected in the price. Only if you have done some maths that disproves this starting assumption should you think of buying or selling a holding. It's doing that maths that preoccupies Pier Analysis.
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