Seeking Alpha

As I've written before, investors shouldn't focus on share price itself as a proxy for value (i.e. that somehow, \$5 stocks are automatically cheaper than \$100 stocks). Instead, investors would be best served by looking at a company's given stock price in relation to the earnings that it generates. I know, I didn't exactly come up with the original thought of the decade on that one.

Since then, I decided to remove share prices from life. I don't want the fact that Apple (AAPL) is trading at \$600, that the Washington Post (WPO) is trading at \$400, or that Seaboard (SEB) is trading around \$2,000 to deter me from making investments in those companies. Likewise, I don't want to ever fall victim to the superficial thought process that I'd rather own about 400 shares of General Electric (GE) than about 100 shares of Colgate-Palmolive (CL), just because I'd get the chance to own "300 more shares".

Even though I know intellectually that (all else equal) it's better to own 10 shares of something that generates \$10,000 in annual profit than own 1,000 shares of something that generates \$1,000 in total annual profit, I wanted to take a step to make sure that I can further reduce the likelihood of falling victim to superficial analysis by putting all the stocks that I want into an excel spreadsheet and converting them to blocks of \$1,000 investments (and removing share price from the equation).

For instance, General Electric is currently trading at \$20.13 per share. Over the past twelve months, GE has generated \$1.225 in earnings, and currently pays out a \$0.17 quarterly dividend (which translates to \$0.68 annually at the current rate). So I divide a \$1,000 potential investment by \$20.13, and get 49.677. Then I take 49.677 and multiply by \$1.225 and get \$60.85, that represents the amount of trailing twelve month earnings that the \$1,000 investment represents.

Likewise, when I do it for the dividend, I can see that each \$1,000 investment represent \$33.78 in annual dividends at that price. Using the trailing twelve months of earnings (and the current dividend, without factoring in an increase), I am able to reach slightly more conservative calculations that incorporate a little bit of extra margin of safety into my calculations (instead of entering the realm of future P/Es that increase how attractive stocks might appear).

I prefer viewing stocks in this manner because it removes the potential for irrational superficiality to color my opinions of stocks. It's a nice additional safety valve, kind of like those drains at the top of the sink and bathtub. By removing stock prices from my life, I can ensure that I am always comparing stocks on an apple to apple basis, enabling a clear-eyed view of the stocks on my radar screen.