It’s All in the Point Spread

By Bob Marshalla

October, 2000

“The key to making money in the stock market is to identify a group of top quality companies with excellent growth prospects, buy them and hold on for the long term.” So simple, so boring, so conventional – and yet so FALSE!  The problem with this prescription is that it leaves out the most important ingredient – the PRICE!  A great company with an even greater stock price is not a way for the buy-and-hold investor to make money. 

The price of the company’s stock can be likened to the point spread in sports.  The sports bettor is not betting on which team will win, but rather on which team will exceed expectations.  And the consensus expectations of the entire betting public are tidily summed up in one number, the point spread. 

The analogy to stock prices is almost perfect.  The stock price is the point spread.  It incorporates investors’ future expectations of company success. A company that achieves fantastic business success by growing profits at 35% per year for the next five years can, nonetheless, be a colossal failure as an investment if it is priced today based on expectations of 45% growth. Just remember, a great company and a great investment are NOT the same thing.  It’s all in the point spread!