In order to be a great investor you must be great at understanding values. What is value? Well the dictionary defines value as the “monetary worth of something”. This is important because there are two types of values. There is the market value, what the item is trading for and then there is the intrinsic value, which is what the item should actually be trading for. The money is made in recognizing the difference between the two, shorting the over valued and going long the undervalued. When we speak on corrections, this is what we mean. A correction is when the market value reverts to the actual intrinsic value.
This is important. Not just because it allows you to make money but because it helps you avoid losing money. You have to know when something high is going to go low so you can avoid it or position yourself to profit from it. You also have to know when something is low and isn’t supposed to be low so you can win when it pops and goes back to where it should be. By doing this you avoid being on the wrong side of a trade or holding.
The problem with market value is that it is based on hype. People talk about what they think its worth, they beat down values with media, they prop up value with media. All while this is going on money is being made. What is important though is that you keep an eye on the financials and the data. After all the hype settles what is real and what is fake?
Recently, I bought the company BYND. This stock popped 10% on Friday and another 10% on yesterday. I sold and took my gain even while the company was up 12%. I always sell into strength. I wanted to sell the high not hold it in hopes that it would go higher. When I saw it floating up too high I knew it was time to take money off the table. A 20% gain in one week is good for me. Waiting for it to run would make me a greedy pig and pigs get slaughtered. So I sold and took my money. Later that night the company popped after earnings but then got hammered the next day. I knew it was time to exit and I did. I now crown myself Master of the Exit.
I am master of the exit and master at avoiding what isn’t lucrative. This is what I did with bitcoin and this is what I am doing with large multi family (100 units or more). I do this because I just see hype and run far away. I also vet the people who are giving me information. I am not taking advice on investing from non investors. I am not taking investment advice from uber drivers, sorry.
How do you determine value?
Stocks: The most important thing you need to know is that a stock price is the present value of FUTURE earnings. This is so important. Especially when we are talking IPOs. Many people slander IPOs because their valuations don’t match the current revenues and net profit. Well, dummy, its not supposed to. The price is based on the future valuation.
You have to know the rules to know what to do. Another way you can determine value is PE ratios. This is used to compare the company you are looking at with the industry average. It is important that you know what something is worth so you can take advantage when things are mispriced.
Real estate: Real estate is valued based on comps. Commercial real estate is valued based on the cashflow. I like this but one thing I realized is that sometimes the comps don’t get it right. An example are the homes in Detroit. These are low cost homes but high cashflow.
We aren’t buying them to live in them, we buy them as cashflow investments and we buy a lot of them. Therefore, it doesn’t make sense to value them based on their comps. When you cap out the cashflow on a Detroit home you get the true value, then compared to what you can pay for the home you realize that there is a bargain to be had.
What should you do?
What you have to realize is that a lot of people don’t know what they are talking about. They are just repeating what their guru told them. This creates opportunity for the thinkers and creators. This creates opportunities to take advantage. It is your responsibility to see through the media, the talking heads, the gurus and strike out on your own path finding and creating your own value. This is what I did. I made money when I stopped listening to fake smart people who are leading you one way while they sneak in through the back door.
What you need to do is educate yourself on the market. Analyze deals. Watch what is going on and make your own informed decision. Only by straying away from the pack can you get the big meat. In the game of investing, contrarians win. I promise you.
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