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Posts Tagged ‘Value’

Chicken RiceThere is no stock market ticker to tell you how much you should value your chicken rice.  Yet you can always sense when it is over-priced or under-priced.  Assume that there is a stall owner who happens to sell the world’s best chicken rice that you love to eat.  It’s tasty, delicious and everything you could ever ask for. 

Then suddenly, the nice owner realises that he could change his prices just to see how you would react.

  1. Price drops to 10 cents – You go hysterical!  You secretly plan to stock up a gazillion plates of your favourite dish.  The owner sees this and senses something amiss with you salivating in front of his stall.  He changes the price.
  2. Price rises to 6 million dollars– You go hysterical (in a bad way) again!  Your face turns black in anger and wonders how many folks can really afford it.  As you sulk, the owner realises that pricing his chicken rice to the same as his favourite TV show (6 million dollar man) is not going get him any customers.  He then changes the price again.
  3. Price returns to 3 dollars – You suppress all forms of ego to buy and consumer your dish.  You will continue to eat there even if the price fluctutes a little from time to time, depending on the situation. 

After all this, do you really know the actual value (not price) of chicken rice?  The reality is that you don’t.  Price changes, but the true value (or intrinsic value) remains rather constant.  Hence, there is always some general idea or feeling to tell if things are over priced, or under-priced, in relation to the actual value of the product.  The absolute value has too many variable affecting it and would be futile to try and find it.  By this, if the price is too far from the value, you should be able to detect it easily.

So what does this have to do with stock skills?  The main point is, we should never try and use all the prescribed methods/tools recommended by experts to determine the absolute true value of any stock prior to purchase.  Rather, these tools and methods should be used to tell us the general valuation range of a stock.  Then we can compare the current prices of stocks to tell if a stock is under-priced or over priced at any given point of time.

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GOLD Member!

GoldmemberOne of my favorite villain in the movie Austin Powers is Goldmember. The funny thing is that this character shows what most people are doing right now!  An overwhelming obsession with gold when the value of the US dollar is in the decline. Didn’t anyone learn from the movie that it was his obsession with gold that made him an evil villain in the first place?

So now to the key question: Should you invest in Gold right now?  The experts, financial analysts, bankers, and even the newspapers are saying that it’s the hottest thing since hot dogs!  Everyone (from your pet gold fish to your granny) should jump in and buy some! Before you do so, pause and think for a moment.

Here is a useful chart to begin our discussion:

30 year historic gold price

  1. In Jan 1974, gold price was approximately USD 100.
  2. Assuming inflation of 6% per year, 36 years later in 2010, gold price should be about 8 times the price in 1974. That works out to be about USD 800.
  3. The year is now 2008. So that means that by simple estimation, the price of gold should be close to USD 800 without any significant change in demand.
  4. Gold price in the market is currently at approximately USD 930.

So it is a risk to get into gold at the current price. So why are people paying higher prices now?  Is there a supply shortage?  Is it possible that Goldmember (the villain) is taking over all of the world’s gold for his evil love for gold showers, and thereby crippling Indian weddings (who needs gold dowry) and Chinese gold teeth markets?  Or perhaps folks are just driven by pure speculation and fear of the falling value of the US dollar.  Whatever the reason, the reality is that there will always be a limited supply of gold.  When there is more demand than supply, prices will rise.  So why is everyone placing more value in gold than money?

Perhaps we should now realise that money is just pieces of paper with some long dead guy’s face printed on it.  So whenever any government wants more money, it has the authority and ability to bring out its mega photocopier and print lots more!  Now where is the value backing paper money?  Some currencies have a micro-small footnote that says “blah blah blah government promises to pay bearer”.  While other currencies even go to the extent of omitting this statement altogether.  So the value of money is actually the value of the government’s promise to pay.  But to pay what is the question even I have no answers to.

Having said that, so gold should be best investments, right?  The problem is that there are no business fundamentals to back up the price of gold except global supply and demand.  So unless you are an expert world economist with the IQ of Einstein and incredible insights, I have no clue what is the true supply and demand!

So if you still insist on betting your wealth on gold at this price, limit your exposure to only 10% of your investment portfolio.  However, if you have several gold teeth, rush to your nearest pawn shop to ask for valuation of your gold fortunes!

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