Why is share price irrelevant?

TL;DR

The price of a share has no correlation with the future growth potential of a business; what matters is the growth opportunities and management's ability to reinvest in the business.

Transcript

g'day my name is rob gary welcome to this week's video this week we're going to have a chat about something of a question i've had over many years and a perception that investors have that the the price you pay for a share will have a huge impact on its future growth potential and the thought process is that if you have a very low price share one o... Read More

Key Insights

• 👨‍💼 Share price has no direct impact on a business's future growth potential; it is the growth opportunities and management's actions that matter.
• ✋ Examples from Berkshire Hathaway show how share price can increase significantly over time, despite initial high prices.
• 👨‍💼 Businesses buying back their own shares can benefit remaining shareholders by reducing the number of shares and potentially increasing the value of each share.
• 👨‍💼 The focus should be on the market value and growth potential of a business, rather than its share price.
• 👨‍💼 The ability of management to reinvest in the business and generate growth over time is crucial for determining its future value.
• 👨‍💼 Share buybacks by businesses can indicate confidence in their own growth prospects.
• 🤨 Businesses that issue new shares may do so to raise capital for expansion, but the success of these endeavors determines their impact on shareholder value.

Questions & Answers

Q: Does the price of a share affect its potential for growth?

No, the price of a share has no correlation with a business's growth potential. The focus should be on the growth opportunities and management's ability to reinvest in the business.

Q: Can a low-priced share have greater potential for growth compared to a high-priced share?

The price of a share does not determine its growth potential. A low-priced share and a high-priced share can both have equal opportunities for growth if the underlying business has growth prospects and effective management.

Q: How does share buyback affect shareholder value?

Share buybacks can be beneficial for shareholders. By reducing the number of shares in circulation, future profits and dividends can be distributed among fewer shareholders, potentially increasing the value of each remaining share.

Q: Are businesses that issue new shares less favorable for investors?

In certain cases, businesses issue new shares to raise capital for expansion or other purposes. While this may dilute the ownership percentage of existing shareholders, if the business successfully utilizes the raised capital to generate growth, it can still be favorable for investors.

Summary & Key Takeaways

• The perception that the price of a share impacts its future growth potential is false; share price is irrelevant to the value and size of a business.

• Examples from Berkshire Hathaway's history demonstrate how share price does not determine future growth potential.

• Businesses buying back their own shares can lead to greater growth for remaining shareholders.