Video Link: https://youtu.be/h1A84eKxcJE
In this episode, Peter Lynch talks about why you shouldn't buy a stock based solely on the fact that the share price is low.
In this episode, you’ll learn:
Why you shouldn't buy a stock just because the share price is low?
Why low share price doesn't equal lower risk?
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PETER LYNCH 00:00
Here’s another one you hear all the time, "it's $3 how much can I lose?" I’ve had people call me up saying, “I’m thinking of buying this stock at $3. How much can I lose?”
Well again you may need a piece of paper for this, but – if you put $20,000 of stock at $50 – your neighbour put $20,000 at $50 to the stock and you put $20,000 at $3 and it goes to zero, you lose exactly the same amount of money, everything. (Laughter)
And people say, “It’s $3. How much can I lose?” If you put $1 million on it, you can lose $1 million. Just the fact the stock – this may be a reason to research a stock. The fact a stock is $3 down from $100 doesn’t mean you should buy it.
In fact, short sellers – people who really make money in stocks, they don’t short Walmart. They don’t short Home Depot. They don’t short the great companies like Johnson & Johnson. They short stocks down from $80 to $7.
They’d like to short it at $16 or $22, but they figured out at $7, this company is going to go to zero. They just haven’t blown taps on this thing yet. It’s going to zero, and they’re selling short at $7. They’re selling short at $6, at $5, at $4, at $3, at $2, at $1.25.
And you know what? If you sell something short, you need a buyer. Somebody must buy the damn thing! You wonder who’s buying this thing? The buyers are people saying, “It’s $3. How much lower can it go?” (Laughter)