It is believed that only companies which have great growth potential or [have] established themselves as "leaders in their field" having left their competition in the dust dare price their stocks thusly because everyone is certain that the companies will be making profits forever. Question: are they [expensive stocks] the better choice for investors? Or would well-researched, cheaper stocks that are carefully picked be just as good?
Is this a question as to whether to choose growth stocks or value stocks? Both have a place in my opinion. There's a ton of research that shows that over the longer term valuation is a key determinant of performance, and as a result buying cheap makes sense. But obviously if you manage to get into a good growth story at ground level then you could do very well out of it. It's when you get into it ex-growth that the problems really start.
I never go for expensive stocks as you never know when a shark might come and eat you. I constantly follow stocks and I came across some stocks which were running pretty high and suddenly plunged upto 95%. Yes 95. Plus the daily percentage change is low for expensive stocks as compared to low price stocks. Let me give you an example. If a stock is running at $100 and at the end of the day it moves to $110, which is plus 10 points. This gives a daily percentage change of 10%, so does your profit increases by 10%. But most of the stocks which are expensive dont change so much in a day. Percentage change is low always. If we take a low price stock for $10, then we only need a movement one 1 point to gain 10% profit.
I don't think low or high price matters so much in the larger scheme of things. If it will hold of gain value it is a good buy now matter how it is priced. If the price gets too high they will split the stock. What matters is whether it is over-priced or not.
I generally keep very little in the more expensive (very high PE or no PE ratio due to little or no earnings, etc) stocks, and only own them if they have very compelling reasons to own them for any length of time. Many techs, biotechs, and oil and gas EP companies fall into such categories. Most money is put into stocks that are relatively cheap / underpriced, particularly longer term. Companies that earn lots of money and are relatively cheap.
I remember a statement from Warren Buffet before saying that it's good to invest in expensive stocks because they are indeed pricey but they will also have great gains in the end. I'm not an expert when it comes to investing in stocks but I have taken note of his statement and I think it does make a lot of sense, especially coming from an expert like him. I would also go for cheaper stocks as long as I have researched well on the reputation and the performance of the company for the past years.
Well how do you look at expensive? If you just take a look at PE then I like to stay away from the high PE ones, simply because there is a lot of growth expected and we don't really know if that is going to happen or not. If the EPS is stable (hopefully growing steadily) and the PE isn't too high then usually in the long run the company will do well.
There is no difference in buying a lot of small stocks, or a big stock. If you put the same amount of money in, you will be getting the same amount of money back if the stocks both increase at the same rate.
Some people confuse "expensive" with a high "sticker price". Berkshire Hathaway A shares have a very high "sticker price", but it is still a relatively cheap stock based upon earnings, growth, margins, return on equity, etc.
I'd say "expensive" stocks are good investments long term if they pay reasonable dividend payouts and have a good history of maintaining stock value. Aiming for stocks you expect to see growth in can be more risky yet also more rewarding short term for sure. It all depends on what you want to get out of the investment. High percentage returns over a short to medium time period? Or passive returns over a lengthy period?
