What investment advice could be more ridiculous than this: buy GM, sell MSFT. GM is losing market-share every year, is saddled with large health-care liabilities and whose bonds have junk status; Microsoft is one of the most profitable software companies, with a huge customer base and a top 3 market-share in various software segments.
Strange as it may seem, while such advice may be wrong, it is not ridiculously wrong (i.e. one has to know more, one cannot dismiss it out of hand). If this sounds completely ridiculous to you, read on…
A share of GM sells at about $25 these days, with the entire company valued at about $15 billion. If things are so bad, why doesn’t it sell for less? Maybe the current price is right, and already takes the bad news into account. If things were better, it might be worth much more. In essence, unless one has more detail, one cannot say that GM is not worth $15 billion.
A share of MSFT sells at about $24 these days, with the entire company valued at about $240 billion. If things are so good for MSFT, why doesn’t it sell for more? Maybe the current price is right, and already takes the good news into account. On the face of it, MSFT being valued so much higher than GM (@ $240B vs. $15B) makes sense.
Now, consider this: suppose that someone analyses GM and MSFT and thinks that GM is really worth $20 billion while MSFT is worth $ 200 billion. Like the market, this analyst thinks MSFT is worth much, much more than GM. However, since his evaluation of the relative difference varies from the relative value reflected in the current market price, it would make sense for him to buy GM and sell MSFT.
The point of this post is not that one should buy GM and sell MSFT. The point is this: it is not ridiculous to sell shares in a good company and buy shares in a bad one. It’s all a question of the price being right.