• Skip to primary navigation
  • Skip to main content

Safal Niveshak

Wit. Wisdom. Value Investing.

  • Articles
  • Newsletter
  • Courses
  • Stock Analysis Excel
  • Podcast
  • Books
  • Login
    • Mastermind (Value Investing Course)
    • Value Investing Almanack (Premium Newsletter)
  • Show Search
Hide Search
You are here: Home / Investing / Think in Market Caps, Not Stock Prices

Think in Market Caps, Not Stock Prices

July 22, 2020 | 3 Comments

Download Screenshot Version


Consider these stock prices –

  • NTPC – Rs 88 per share
  • Bajaj Auto – Rs 3000 per share

Do these prices tell you something if you were to decide which of these stocks to buy?

Well, people who look at a stock’s “price” and like the one that is in single or double digits, would consider NTPC to be cheaper than Bajaj Auto. But, in reality and sensibility, stock price is not the way you assess which stock is cheaper. You understand a business, arrive at its intrinsic value, and then compare that value with the stock’s price. If the price is lower than intrinsic value, it is a cheap stock. If the price is higher than intrinsic value, it is an expensive stock.

Anyways, now consider these two companies’ market capitalization (market cap = stock price * shares outstanding) –

  • NTPC – Rs 85000 crore
  • Bajaj Auto – Rs 85000 crore

Do these market caps tell you something if you were to decide which of these stocks to buy?

Not much, but they tell you something really important.

Market cap tells you what the whole company is worth as per the stock market. Of course, you also need to measure the debt and cash in the company’s books (to arrive at enterprise value, which is market cap + debt – cash), but market cap tells you roughly how much you must pay to buy the entire equity in a given company today.

Of course, looking at just market caps and assuming that whatever the market is charging for a company is what it’s worth, is also a mistake.

But one very important question that looking at market caps, say of the above two companies, lead me to is this – If I had Rs 85,000 crore to invest in a company and could be its sole owner, which of these two companies would I buy (assuming there are just these two companies I can choose from)?

Starting from this premise, my mind naturally will focus on basic business issues such as payback (how fast can the company generate Rs 85,000 crore in profit to return my investment), cash flow, debt levels, revenue growth prospects, capex needs, profit margins, and return on capital.

Generally, the longer it takes a company to return my investment, the more I am inclined to walk away.

And if I would not want to own the entire company, I will not buy 100 or even 10 shares of it.

“Own a business, don’t rent stocks,” is what Warren Buffett has often advised.

Thinking in terms of market caps and not stock prices is a way to have an owner’s mindset. And good investment behaviour starts with this attitude of ownership.


P.S. Consider one more example of the importance of thinking in market caps than stock prices. MRF’s stock price is Rs 65,000 per share (oh yes, per share!) while DLF’s stock price is “just” Rs 140. But you can buy the entire MRF stock at market cap of Rs 27,000 crore while you need to pay 33% more, or Rs 36,000 crore, to buy the entire stock of DLF.


Download Screenshot Version

* * *

That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn, or just email them the link to this post.

Stay safe.

With respect,
— Vishal

Join 85000+ Smart Investors

Subscribe to our best stuff on investing, stock analysis, and human behaviour. Plus get access to Seven E-Books on Investing + Two Special Reports + One Stock Analysis Template. All for FREE!

No charge. Unsubscribe anytime.

Be a part of our growing tribe. Join us on Twitter.

Reader Interactions

Comments

  1. Amit Kinhikar says

    July 25, 2020 at 12:32 pm

    Thanks Vishal! Thinking in terms of MCAP instead of Stock Price changes completely the way we look at investment process, it is like becoming owner from tenant 🙂

    Reply
  2. Arpaan Begdai says

    July 25, 2020 at 5:01 pm

    Hi Vishal, That’s a really different perspective to look at the things, and I must admit that I somehow like this thought process. Eventually, it is all about integrating the behaviour and decision making process.

    Reply
  3. HARISH KATIRA says

    August 1, 2020 at 5:25 pm

    INDEED A DIFFERENT ANGLE TO LOOK AT BUYING A SHARE…..WHETHER IT IS ONE SHARE OR THE WHOLE OF THE MARKET CAP….THE POINT IS WHETHER THIS SHARE IS WORTH BUYING AND WHETHER, THEREFORE, I SHOULD BUY IT OR NOT….||||

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Join 85,000+ Subscribers and Get Our Stock Market Investing Insights Right Into Your Email

About   |   Newsletter   |   Courses   |   Books   |   Connect

Uncopyrighted & Handcrafted with in India

  • Twitter
  • Youtube
  • Instagram