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Collection: Peter Lynch - #23 'Don't Buy Just Because the Share Price is Low'



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)



[YAPSS Takeaway]

ust to share a story on this topic that I came across recently.

A was talking to B about Company X trading at less than 1.00 (it was a well-known company). 30 minutes later, B called his broker and bought 50,000 worth of Company X and suggest to C to buy calling it "Once in a lifetime opportunity, how much lower can it go?"

With a curious mind, I look up on Company X. The industry of Company X is heavily affected by COVID-19, and Company X did not have a strong balance sheet; low cash with extremely high debt, high net loss, negative operating cash flow, etc.

Maybe I was wrong on this "Once in a lifetime opportunity," and B is right, but I think there are handful of companies out there better than Company X although the price is much higher. Who knows, time will tell and it's fun to watch with my popcorn ready. :)

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