19 February 2016

Price vs Value

Most of the time we heard that a lot of aunties know how to look for bargains or good deals, especially if you are those type of person who loves to go to the wet market and buy fish, vegetable, prawn, chicken, duck etc. So what does it really takes for a person to really know where, what, when and how to look for bargains?

If we were to boil it down to the simplest approach, its all about price and value! Now imagine you are an auntie who do once a week wet market shopping, you need to buy "raw materials" to cook and prepare meals for your families. One day, you saw that there's a fishmonger shouting "Offer, offer, big offer, today all fishes selling at half price than a week ago" On the other hand, when you went over and visit the vegetable stall, the auntie seller told you that the price for all vegetables will cost 3 times more now as the weather affect the harvest of the crops.

Given this scenario, what would your reaction be? Probably your mind will be telling you "Hey! Since the price of all the fishes is on a 50% discount, i will buy more and since the vegetable now cost 3 times more expensive, perhaps I shall not cook any vegetable for dinner tonight!"

For daily essential needs, when the price goes down, we will tend to buy more and vice versa. I hope by now you can see the relationship between price and value. So now the question you may ask yourself "So what are the factors that determine price and value?" If this question has run through your thoughts, give yourself applause! You possessed the ability to think!

Why do you think the fishmonger will sell you his fishes at a 50% discount and the auntie selling her vegetable at 3 times more? To find out more, you walked over and ask the fishmonger and the fishmonger told you "That's because recently Japan "radiation leak" had caused so much fear that nobody dare to eat my fishes now and my business was so bad!!!"

"hmm....., you thought to yourself with some enlightenment" Supply and demand + fear! When everyone is so afraid to buy seafood, the price of it will drop tremendously since given the same amount of supply, with lesser demand, the price will fall.

If you can apply this analogy to the financial market, I believe by now you can see some co-relationship. However most retail investors have the misconception of price. Most think that $100 per share of a company is more expensive than $1 per share of another company. This is a very big misconception. The reason behind this is we have yet to compare it's value!

Imagine your body for your daily activity requires 3000 calories.

This carrot can provide your body with 100 calories, (just giving you an example)

This carrot cost you $1 per unit.

Logically you need to buy 30 carrots to meet your body nutrition requirement which will cost you $30.

This orange can provide your body with 500 calories (another example)

This orange cost you $3 per unit

In order to meet your body nutrition, you would need to buy 6 oranges ( 6 x 500 calories  = 3000 calories)

And buying 6 oranges cost you $18

In conclusion, what your body needs is only 3000 calories, by preferring to buy 6 oranges than 30 carrots you achieve a cost savings of $12!!!! Now if you can see the co-relationship between vegetable and the financial market (by comparing companies) then you will understand that $100 per share of a company is not necessary more expensive than a $1 per share of another company

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