KNOWING THE PRICE IS BUT THE BEGINNING. VISION IN THE MARKET MEANS SEEING THE VALUE HIDING BEHIND THE PRICE. IT’S BLINDNESS TO THE DIFFERENCE BETWEEN PRICE, VALUE, AND WORTH. THAT’S WHAT KEEPS MANY INVESTORS OUT OF SOME OF OUR BIGGEST WINNERS. DON’T MISTAKE A $1400 SHARE PRICE FOOL YOU AS EXPENSIVE.
Things happen. You’re standing there. There’s s somebody else and a car and she says–
“You want a car?”
Do you know the answer? Yes, no, or maybe. Only one answer here is right. Which one?
We do it everyday, without a second thought. We traffic in concepts, ones that lead our thinking. Yet do we think enough about them?
The human mind is jaw-dropping in its’ ability to routinely process complex concepts. The words in our title are not merely words–cost, value, etc. They are complex concepts we traffic in daily, but casually for most of us. We use all these terms in determining money decisions. Is knowing these critical financial concepts casually really enough?
Investing is a hunt for value, something priced below its’ worth. Price is relative, and cost unclear upfront. Worth is relative to price and subsequent cost. Worth also remains part subjective–your kid’d first once of gold. It’s sentimental and it’s gold yo. How much is a “sleep at night stock” worth now? They say you can buy multi-million dollar properties in the Caribbean now for pennies on the dollar. What’s that say about fluctuating worth, and cost, thus value?
The right answer depends on relative value.
“$20k.” she says, “And it’s factory-certified brand new, 4 miles on the clock, and it’s a Benz–the new one.”
Answer yes–If; you drive, need a car, are reasonably convinced by what she’s confirming, have the jack, or you own a car lot. You have a price, you see value, it reads as clearly worth it, but do you know the actual and potential costs?
She’s not done.
“Cash only–and within the next 45 minutes,” she says.
Oops. Is that an ATM? Worth, value, and cost, all return as variables. What’s it worth to you now? What are the odds it’s hot now? Risk. How far’s the bank? Hassle/cost. Exactly how much bundled cash can you carry out of a suburban bank before the branch manager phones the DEA or ATF? Besides, how many of us have Zero Caliber totes for transporting?
Quantifiable. For equity investors price is set up-front, changes constantly, but is precisely knowable.
Within stock investing value is one touchstone metric. We call such efforts and end products “valuations.” We rank such with the price-to-earnings” multiple. Even better is the “peg ratio” or “price-to-earnings-growth”(PEG) ratio. Value is quantifiable and thus transferable.
When Twitter dropped more than 10% we felt it had become a value. They have been reporting great quarters one following another. That’s fundamental value. Of course the price action has remained ugly, the chart uglier. And sentiment–after FB began testifying on capitol hill? Less value.
Taken together these factors render TWTR a risk rather than a value. TWTR felt “worth less.” Despite an 11% vault up. The stock remains technically wrecked. That’s risk, because there may be a cost.
For stock investors cost comes in multiple forms. Share price, commissions, opportunity. How much does experience cost?
Money sitting in AT&T cannot rise with AMZN. That’s a very real cost. It’s not lost dollars, but rather lost potential. Currently owning T, means also owning the risk of T. All risk is not created equal. Think rock climbing vs. golfing.
Time cost/Time Value
Time is money and investing requires both. Money can be invested in only one place at a time. That’s a time commitment, successful or no.
The potential costs of owning AT&T now include share price depreciation, the risk of further price decay, in a rising rate environment, losing the Time-Warner case, a mature American wireless market, execution risk, along with increasing competition, including streaming leader NFLX.
Golfers and rock-climbers both face risks. Golfers may lose a tee time, if jammed up in traffic. Climbers may lose a hand-hold, if struck in the face by falling mineral matter.
Not quantifiable. While value is often denominated in dollars saved/spent, worth seems more personal or shapeless. How much is the Nike Swoosh worth?
The nature of worth is partially subjective. Howard Hughes felt living in the Desert Inn in Vegas was worth buying the entire hotel. Howard also felt it “worth it” to buy the one across the street too, just to dim the sign shining into his penthouse.
Worth can also be viewed according to timing and circumstances. How much is drinking water worth in a hurricane zone? How much is a brand new Mercedes worth on an ice flow? How about in your driveway? What about if she told you that, although it only has 4 miles, some rouge salesman lived in it for two months? Still looks good. But do you still want it? That’s subjective, right?
ow much was it worth to be in T on Wednesday when it lost more value in a single session then it pays out annually by dividend? How much is it worth now to shareholders? 6% less then close on Tuesday.
Facebook has fallen and risen again, well beyond the $161.00 STOCKjAW vented it off. Foolish? We’ve felt foolish, and green with envy. Twitter jacked up over 11%. We felt stupid. Yet, it’s falling again. Both these stories, and AT&T, churn forward.
How can investors determine the actual worth of owning any of the three? Although the price asked is clear, the full risks are not. Thus costs are unclear, and in turn the worth. So, we don’t see a lot of value in the proposition just now.
Thanks for Reading. Keep Rolling.
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