Hi David,
Good question. To understand more, read on - i will use ridesharing to explain this.
Firstly, let me comment: thatâs how anyone makes money in general. You acquire an asset for $X (your own time, other peopleâs time, labour, raw material etc), and perhaps after some processing (or rebranding), sell it for $Y (hopefully Y>X). Buy low, sell high. Or put another way: buy at a price, sell at a higher price.
Value investing is just one of many stock-picking strategies that people have come up with, in order to achieve this outcome (buy at $X, sell at $Y where Y>X)(note: not necessarily in that order in a process called shorting), and the mindset behind it is different from other strategies.
To understand value investing, you have to understand some fundamental truths about the stock markets (and perhaps about humans). With the popularity of ride-sharing apps, i will use grab as example.
Caveat: I am going to use some slightly inaccurate terms below, but it gives you the general gist.
Truth #1: The price in stock markets has âsurge pricingâ built-in. Shocking? Well, basically what i am saying is that the âequilibriumâ price of a stock is determined by demand and supply of the stock. If everyoneâs buying and nobodyâs selling, price goes up. If everyoneâs dumping and nobodyâs willing to buy (or just lost their jobs), then price goes down. Surge-pricing.
Truth #2: Humans behave inconsistently and consistently at the same time. They hate surge pricing generally (itâs the same distance, how can it cost $12 before rain, and $30 during rain?), and yet contributes to it (everyone is buying this stock, must be good!)
Truth #3: The stocks you buy represents actual fractional ownership of a real, living and breathing, money-making entity - one with a track record, and actual, real-life, intelligent humans working there for a large part of their waking hours. And for the most part, has predictable growth.
These 3 truths, when combined together, simply tells you this: The price of the stock you see fluctuates on a daily basis (because of âsurge-pricingâ), but once you buy it, you own an actual business with predictable growth. âPrice is what you pay, Value is what you getâ.
To succeed at value investing requires identifying âmispricingâ - that itâs selling below its actual value (âJurong to Orchard is only $9! Good deal!)(note: actual trip on gojek). Bargain hunters in general, are genetically primed for this activity. Somehow they know the âintrinsic worthâ of an item, and when they see it being sold cheaply at a flea market, or a âclosing-downâ sale, they snap it up, safe in the knowledge that they have bought something that can be resold at a higher price because of its âintrinsic valueâ.
To explain how to calculate the intrinsic value, will take up many thousands of words. But I assure you, no differentiation or integration required. All of us intuitively can feel âfair valueâ or âgood dealâ when it comes to a ride because we do it regularly. When it comes to investing, itâs the same: Do it regularly, study the market, understand whatâs fair value and whatâs a good deal or when itâs ripping you off, and you will do well in the stock market. Unfortunately, most people study the prices between gojek and grab and comfort more regularly than they do investing.
And THAT is value investing, using ridesharing as an example.
Let me know if this analogy works!
Hi David,
Good question. To understand more, read on - i will use ridesharing to explain this.
Firstly, let me comment: thatâs how anyone makes money in general. You acquire an asset for $X (your own time, other peopleâs time, labour, raw material etc), and perhaps after some processing (or rebranding), sell it for $Y (hopefully Y>X). Buy low, sell high. Or put another way: buy at a price, sell at a higher price.
Value investing is just one of many stock-picking strategies that people have come up with, in order to achieve this outcome (buy at $X, sell at $Y where Y>X)(note: not necessarily in that order in a process called shorting), and the mindset behind it is different from other strategies.
To understand value investing, you have to understand some fundamental truths about the stock markets (and perhaps about humans). With the popularity of ride-sharing apps, i will use grab as example.
Caveat: I am going to use some slightly inaccurate terms below, but it gives you the general gist.
Truth #1: The price in stock markets has âsurge pricingâ built-in. Shocking? Well, basically what i am saying is that the âequilibriumâ price of a stock is determined by demand and supply of the stock. If everyoneâs buying and nobodyâs selling, price goes up. If everyoneâs dumping and nobodyâs willing to buy (or just lost their jobs), then price goes down. Surge-pricing.
Truth #2: Humans behave inconsistently and consistently at the same time. They hate surge pricing generally (itâs the same distance, how can it cost $12 before rain, and $30 during rain?), and yet contributes to it (everyone is buying this stock, must be good!)
Truth #3: The stocks you buy represents actual fractional ownership of a real, living and breathing, money-making entity - one with a track record, and actual, real-life, intelligent humans working there for a large part of their waking hours. And for the most part, has predictable growth.
These 3 truths, when combined together, simply tells you this: The price of the stock you see fluctuates on a daily basis (because of âsurge-pricingâ), but once you buy it, you own an actual business with predictable growth. âPrice is what you pay, Value is what you getâ.
To succeed at value investing requires identifying âmispricingâ - that itâs selling below its actual value (âJurong to Orchard is only $9! Good deal!)(note: actual trip on gojek). Bargain hunters in general, are genetically primed for this activity. Somehow they know the âintrinsic worthâ of an item, and when they see it being sold cheaply at a flea market, or a âclosing-downâ sale, they snap it up, safe in the knowledge that they have bought something that can be resold at a higher price because of its âintrinsic valueâ.
To explain how to calculate the intrinsic value, will take up many thousands of words. But I assure you, no differentiation or integration required. All of us intuitively can feel âfair valueâ or âgood dealâ when it comes to a ride because we do it regularly. When it comes to investing, itâs the same: Do it regularly, study the market, understand whatâs fair value and whatâs a good deal or when itâs ripping you off, and you will do well in the stock market. Unfortunately, most people study the prices between gojek and grab and comfort more regularly than they do investing.
And THAT is value investing, using ridesharing as an example.
Let me know if this analogy works!