The most important relationship in Investment or for that matter in any financial assets is between value and price....Yes it is and if you leave any one or the other your financial success in no way guaranteed...both can to go together... hand in hand...and it is like a symbiosis kind of relationship...and is of immense benefit to achieve financial stability....
i will give you an example and it is my most favorite example which i tell to everyone whom i meet...
Imagine about the shirt or t shirt you are wearing right now...can you guess what is the price of that shirt or tshirt...
Lets say....the price of that shirt or tshirt is Rs. 2000/-...
Okay now in normal condition and if you think rationally for the same shirt or tshirt will you pay say Rs. 10000/-...yes you heard it right...and what if some one comes and offers you to buy the same shirt and tshirt for Rs. 10000/-....now imagine your initial reaction...WWWhhattt...are you mad...are you gone insane...daaru ppee kkae aayaa hai...these is our immediate knee jerk reaction on hearing the 10000/- price for the same shirt ot tshirt....and you will say uulluu banaa raha hai....yes he is....right
now in the second scenario if the same person comes and offers you the same shirt and tshirt for Rs. 1100/-...what will you do....you will run very fast to grab the deal before he offers it to someone else...that left out feeling of missing to buy the same shirt or tshirt at 1100/- is very strong and you dont want to miss the opportunity to reward yourself by buying it for discounted price... and it is more wise to buy at Rs.1100/- because the actual value of the same shirt or tshirt is Rs.2000/-
But in stock market or for that matter any financial assets we do the opposite transaction.. i mean when the stock prices are going up we jump in to the band wagon and invest our hard earned money in to those outperforming stocks to make quick money in a short period of time and giving a pass to the valuation side of the picture... what i want to say in midst of the euphoric trend we concentrate totally on the Price of the stocks and forget about the valuation completely...at that buying price of the stock we forget to evaluate...what is the actual value of the company...and we blindly buy because of our greed to make quick short term money...yes as per the first example you are even buying at Rs.10000/- thinking that a bigger fool will come and buy from you at 12000/-...hahahaaaa
but dont curse yourself if you have done the same thing yourself....because it is in the human beings nature to act in such a stupid manner and cause harm to ourselves...and for that reason we cannot reach our goals of financial stability....
as per the second example... now the stock market momentum is downwards and the whole world is selling and the scenario becomes like the same shirt or tshirt whose value was Rs. 2000/- is now selling at Rs.1100/-....what happens in these scenario is you are also selling at Rs.1100/- and because all are selling the price of the stock goes down and as per low price you still get better Value at those discounted prices....the whole world is behaving irrationally and so bargain opportunities are there to grab...but no because we are in fear mood that the world economy will collapse we have to sell irrespective of Price and Value...we have to be the first one to sell before anyone can sell...
and the above saga keeps on repeating in every Cycle of boom and bust...and so only 5% of the smart people who are aware of these folly make lots of money and create wealth for themselves because they are so sure and they know that 95% fools who are active in the stock market will come and loss their hard earned money and indirectly create wealth for them...
Some Recent Examples....
high price current price
Ambuja Cement 292 197
UPL 902 660
Federal Bank 127 80
Sun Pharma 1200 560
the above list is endless.....price is what you pay...value is what you get...if you pay higher price you get less value...and if you pay less price you get higher value...now it is on you on which side you want to be....ambuja cement and many other stocks were highly priced as per their actual Value and so now the price is regressing towards the actual Value and at one point the price and the actual value price will concide and will be same and that is the time you buy and buy even more if it goes below its intrinsic value or the actual value price...
But knowing the Value is the most important thing and you will have to do that hard work to know the Approximate Value of the company and for that matter you will have to read the balance sheet of the companies...
i will give you an example and it is my most favorite example which i tell to everyone whom i meet...
Imagine about the shirt or t shirt you are wearing right now...can you guess what is the price of that shirt or tshirt...
Lets say....the price of that shirt or tshirt is Rs. 2000/-...
Okay now in normal condition and if you think rationally for the same shirt or tshirt will you pay say Rs. 10000/-...yes you heard it right...and what if some one comes and offers you to buy the same shirt and tshirt for Rs. 10000/-....now imagine your initial reaction...WWWhhattt...are you mad...are you gone insane...daaru ppee kkae aayaa hai...these is our immediate knee jerk reaction on hearing the 10000/- price for the same shirt ot tshirt....and you will say uulluu banaa raha hai....yes he is....right
now in the second scenario if the same person comes and offers you the same shirt and tshirt for Rs. 1100/-...what will you do....you will run very fast to grab the deal before he offers it to someone else...that left out feeling of missing to buy the same shirt or tshirt at 1100/- is very strong and you dont want to miss the opportunity to reward yourself by buying it for discounted price... and it is more wise to buy at Rs.1100/- because the actual value of the same shirt or tshirt is Rs.2000/-
But in stock market or for that matter any financial assets we do the opposite transaction.. i mean when the stock prices are going up we jump in to the band wagon and invest our hard earned money in to those outperforming stocks to make quick money in a short period of time and giving a pass to the valuation side of the picture... what i want to say in midst of the euphoric trend we concentrate totally on the Price of the stocks and forget about the valuation completely...at that buying price of the stock we forget to evaluate...what is the actual value of the company...and we blindly buy because of our greed to make quick short term money...yes as per the first example you are even buying at Rs.10000/- thinking that a bigger fool will come and buy from you at 12000/-...hahahaaaa
but dont curse yourself if you have done the same thing yourself....because it is in the human beings nature to act in such a stupid manner and cause harm to ourselves...and for that reason we cannot reach our goals of financial stability....
as per the second example... now the stock market momentum is downwards and the whole world is selling and the scenario becomes like the same shirt or tshirt whose value was Rs. 2000/- is now selling at Rs.1100/-....what happens in these scenario is you are also selling at Rs.1100/- and because all are selling the price of the stock goes down and as per low price you still get better Value at those discounted prices....the whole world is behaving irrationally and so bargain opportunities are there to grab...but no because we are in fear mood that the world economy will collapse we have to sell irrespective of Price and Value...we have to be the first one to sell before anyone can sell...
and the above saga keeps on repeating in every Cycle of boom and bust...and so only 5% of the smart people who are aware of these folly make lots of money and create wealth for themselves because they are so sure and they know that 95% fools who are active in the stock market will come and loss their hard earned money and indirectly create wealth for them...
Some Recent Examples....
high price current price
Ambuja Cement 292 197
UPL 902 660
Federal Bank 127 80
Sun Pharma 1200 560
the above list is endless.....price is what you pay...value is what you get...if you pay higher price you get less value...and if you pay less price you get higher value...now it is on you on which side you want to be....ambuja cement and many other stocks were highly priced as per their actual Value and so now the price is regressing towards the actual Value and at one point the price and the actual value price will concide and will be same and that is the time you buy and buy even more if it goes below its intrinsic value or the actual value price...
But knowing the Value is the most important thing and you will have to do that hard work to know the Approximate Value of the company and for that matter you will have to read the balance sheet of the companies...
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ReplyDeleteTrue, one must buy at the lowest possible price because v never know what is the best price, so v hv to always wait for the right price to purchase and likewise for the sale price also ... Buy in multiple n sale also when the price is competitively higher than the product value (overvalued), but if the management is honest and the product good (like a monopoly) u can hold it for a long term
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