A Quick investment Puzzle
Today let’s have some fun. Suppose there are three stocks from which you can choose to invest in only one. Each stock has only a one line description which you can take as being true.
- Stock A, which pays no dividends, but is expected to be worth 30 per cent more than it is today in three years.
- Stock B that is fair value today.
- Stock C, which also pays no dividends, but is expected to double in 10 years.
If you could only buy one stock, which stock would you buy in order to maximise your return on investment? And why? Remember, this is only fun, so don’t be shy in throwing out any answer that you think might be correct.
And for those who really love this stuff, here is a second puzzle.
Imagine you could go back in time to precisely four years ago. Mr Market offers you three investment options, of which you may only choose one.
Puzzle 2: Four years ago you may buy:
- Investment X: The Coca-Cola Company (NYSE: KO) at a 7 per cent discount to the market price at the time – which equates to 17.5x P/E ratio.
- Investment Y: Facebook (NASDAQ: FB) at a 130 per cent premium to the market price at the time – which equates to 290x P/E ratio.
- Investment Z: MSCI World Total Return Index at the time – which equates to a 19x P/E ratio.
Which investment option would you buy in order to maximise your return on investment?
We’ll post the answers next week. In the meantime, happy pondering :)
Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.