Looks like Gordon Gekko beat me to the punch. A comment that was left the other day sparked me to write about a pet peeve of mine — people focusing on stock price & number of shares (smoke & mirrors) instead of dollars & percentages (the true equalizer). I’m still gonna write that article but in the mean time check out what Gekko wrote on his blog: ” The Myth of a Stock Price”

Update: Tom left the following in the comments. He did a great job of explaining why people tend to focus on lower priced stocks and why they should change their thinking:

Hi Mike,

When I first started trading with a small account I used to prefer low-price stocks, but I’ve since learned my lessons. I think a few of the reasons that some people (especially new traders with small accounts) prefer low-price stocks are:

1) It makes them feel good they own a lot more shares for the same amount of money (illusion of more significant ownership of a particular stock.)

- My lessons: more shares for the same amount of investing money also means more risks if the stock doesn’t move in my desired direction. I’m not more or less important, or poorer/richer if I “own” more shares of a company. It’s the difference in share price when I buy and sell the stock that affects my bottom line.

2) They are hoping to be lucky enough to cash in on some of those stocks that double/triple/quadruple or more in a short period of time, like FORD, GEOI, ABLE, BOOM, etc. (hope and luck mentality.)

- My lessons: I can only “find” those stock in hindsight. “Hope” usually doesn’t work out in the stock market. And I’ve never been good/lucky enough to catch those big movers.

3) They tend to think that it’s easier for, say, a $10 stock to move up by $1, than a $100 one to move up by $10, even though both equal a 10% move. This false logic may be induced by:

a) Without thinking clearly in term of percentage gain, a $1 move would seem to be a lot more feasible than a $10 move (absolute dollar illusion.)

- My lesson: think in term of percentage gain rather than absolute dollar gain. A $1 move in a $5 stock (20%) is not at all more feasible than a $40 move in a $200 stock. In fact it could be harder. Look at SUNW and GOOG, LU and CME.

b) Since a few stocks they know make large moves within a short time (similar to those in 2 above), they tend to think (erroneously) that this is the norm rather than the exception (false generalization.)

- My lesson: stocks that make large moves within a short time are the exceptions rather than the norms, and at least for me, extremely hard to catch.

4) People with small trading accounts tend to like low-price stocks, since they may be inclined to think they can only afford cheap stocks instead of high-price stocks ( because “they are just too expensive”.)

- My lesson: “expensive” stocks can even get a lot more expensive, and “cheap” stocks can get a lot cheaper. In trading, I only try to achieve a potential percentage gain for my account. Hence, I’d rather own a few shares of “expensive” stocks that keep going up rather than many more shares of “cheap” stocks that keep going down.

5) Also, in general, don’t some people only want “bargains”, “discounts”, and cheaper merchandises for their money? (misconception of “value”.)

- My lesson: there’s a big difference between “cheap” stocks and “value” stocks. Since I’m not knowledgeable enough to tell the difference, I’d rather assume that - as O’Neil says - cheap stocks are cheap for a reason.

Think: why is a Hyundai a lot cheaper than a BMW?
People may argue that, they know why, but due to various reasons, such as budget constraints, they can’t afford a BMW. I have no problem with that, and no particular problem with Hyundai either, just use it as an example.

However, I think in trading/investing, with the same amount of money, I probably would do better with the BMW of stocks like GOOG, CME, rather than the Hyundai of them like SUNW and LU. For ex., with a $10,000 account, I could either buy 50 shares of GOOG when it was at $200, or 2,500 shares of SUNW when it was at $4 two months ago. How would my account be doing now?

Of course, the caveat is that in the stock market, it’s often not as obvious to tell the differences between 2 stocks as those in 2 cars in real life. But that’s another issue, and something I have to learn. In sharing my own experience, I just want to point out some misconceptions about “cheap” and “expensive” stocks, and how many of them you want to “own”.