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Price and value are not the same thing

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By Michael O’Connor

To understand markets, you first have to realise that 'Price' and 'Value' are not the same thing.

The major indexes continued to trade relatively flat in recent days. The vast majority of Stocks struggled to eke out gains as a lack of clear market catalysts kept institutional investors on the sidelines, while retail traders fuelled the ongoing meme stocks rally. As social media hype pushes the likes of AMC, GameStop and Bed Bath & Beyond 'to the moon,' the crypto market continues to trade in the opposite direction, with all major crypto names recording double-digit losses early in the week.

The short squeeze is back

Earlier this year, GameStop saw its share price run from $19 to $483 as the Reddit retail traders banded together to punish the wall street speculators. In recent weeks, the short squeeze is back in fashion. The new king of meme stocks is AMC Entertainment. Recently on the brink of bankruptcy, the movie theatre chain's stock is up more than 2,000% this year after another roller-coaster week.

While this phenomenon is hard to comprehend at times, in simple terms, the Internet has brought forth the age of virality, and the stock market is not immune.

Younger generations who grew up on the Internet are now having a significant impact on specific companies. Their risk tolerance seems to be much higher than previous generations, and their willingness to band together to support a viral trend knows no bounds.

While these short-term individual stock surges may not significantly impact markets over the longer term, the meme stock craze is here to stay as the gamification of investing becomes a powerful force in an era of social media dominance.

All this speculation raises a lot of questions from investors. Nervous onlookers wonder if markets are broken, worried about how such 'mindless risk' can undermine the validity of the market as the 'meme stock vigilantes' blatantly disregard traditional valuation metrics.

All this recent 'mispricing' has highlighted one of the most common investing misconceptions.

To understand markets, you first have to realise that 'Price' and 'Value' are not the same thing.

Value is driven by cash flows, growth and risk. Of course, you can disagree about what those cash flows look like or how they are calculated, but the fundamental drivers of value remain the same.

Price, on the other hand, is simple economics 101. Demand vs. Supply. What drives demand and supply is typically mood and momentum. As a result, stock prices do not have to make rational sense at any one moment in time as they are driven by a myriad of human emotions.

Mood and momentum

For me, the current market conditions are reflective of a pricing market being driven by mood and momentum. That isn't to say that this is necessarily a bad thing. Markets will always reflect human behaviour in some form, and sometimes this behaviour will be more pronounced as price and value push in different directions.

This recent price volatility doesn't mean you have to change to momentum and memes when selecting your next investment. While the FOMO can be unbearable at times. The truth is, the value factors of cash flows, growth and risk are what ultimately drive markets over the longer term.

For more investing insights visit www.theislandinvestor.com.

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How to value a company

By Michael O’Connor, theislandinvestor.com Every company valuation is simply numbers from today multiplied by a story about tomorrow. You have financial statements that give you an insight into how the […]

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By Michael O’Connor, theislandinvestor.com

Every company valuation is simply numbers from today multiplied by a story about tomorrow.

You have financial statements that give you an insight into how the company is performing at a specific moment in time, but it will be the future growth projections from management and market analysts that ultimately determine the price.

Take Tesla, for instance. Revenue and cash flows provided insight into the company’s performance, but it was predictions about future automated driving capabilities, battery production capacity and a world pivoting towards electronic vehicles that drove the company to its trillion-dollar valuation. Today, the revenue and cash flows are better than they have ever been, but the story about tomorrow has faded, and the company is down almost 60%.

While the numbers from today can be quantified, the story is driven by the future growth possibilities of the company. These future growth possibilities can seem rational at any one moment, but as the economy and company performance change, so do the growth possibilities.

Be careful how much weight you put on the stories the market is telling you about specific companies. As the information changes, so too will the story.

To quote Morgan Housel

“We can use historical data to assume a trend will continue, but that’s just a story we want to believe in a world where things change all the time”

Valuation tips

When valuing a company, you need to listen to the story being told by the company’s management team and assess whether this story is economically viable.

Here are three areas to focus on and some questions you should always ask yourself when valuing a company.

Current Cashflows

Is the company generating the profits needed to fund future business? Are the gross and net margins of the company competitive? How stable has the revenue generation been over time? Has the ROE from management been competitive?

Growth Potential

What has the revenue and earnings growth rate been over time? Are there potential revenue streams not currently being accounted for? Does the company have operating leverage that will help drive future profit margins? Does the company have a durable competitive advantage?

Future Risk

Who are the major competitors in the space, and does the company have an established moat to protect its market share? At what point will the company saturate the market, inhibiting future growth? Is the story currently being told by management viable if economic conditions changes?

Stock Picking is Hard

Since the 1940s, the phenomenal return of the S&P 500 has been generated by just 7% of the companies within the index. That is to say, 93% of the companies that made up the index reported flat or negative returns over time.

Remember, while the stock market has historically provided positive returns, picking individual names remains a difficult feat, with the odds very much stacked against you.

For those who get it right, financial elation awaits. But beware, information is constantly changing, so the probability of success can be lower than you think, no matter how strongly you believe in the future story you tell yourself.

If you have any investing questions, scan the QR code above and reach out. Always happy to help.

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Broadening the Vacant Homes grant

By Ted Healy of DNG TED HEALY  Vacant property grants of up to €50,000 are to be extended to all vacant properties across the country in a bid to bring […]

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By Ted Healy of DNG TED HEALY
 

Vacant property grants of up to €50,000 are to be extended to all vacant properties across the country in a bid to bring as many unoccupied buildings back into use as family homes.

Until now the grant has provided financial supports to refurbished vacant properties in towns and villages only.

However, at the time of writing, it is expected that Housing Minister Darragh O’Brien will announce that he is bringing properties in inner city areas including Cork, Dublin, Galway, and Limerick as well as one-off farmhouses in rural locations into the scheme.

Over 400 applications for the scheme have been made to date since its launch in July of this year. While the qualifying criteria is to be broadened out, it is understood that there are currently no plans to increase the €50m which had been originally allocated for the scheme.

However, this could be reviewed if the scheme is oversubscribed.

Under the scheme, a grant of up €30,000 is available for the refurbishment of vacant properties for occupation as a principal private residence, including the conversion of a property which has not been used as residential heretofore.

However, people can apply for a top-up grant of up to €20,000 where the property is derelict and structurally unsound.

The grants, which are primarily aimed at helping first-time buyers to bridge the cost of refurbishing older and unused homes can also be combined with supports received under the Sustainable Energy Authority Of Ireland (SEAI) Better Energy Homes scheme.

Properties must be vacant for two years or more and built before 1993 to qualify.

Preliminary results from Census 2022 recorded more than 166,000 dwellings as vacant in the State.

While some of these may have been unoccupied on a temporary basis, more than 30% (48,387) of the dwellings vacant in 2022 were also out of use when the previous Census was carried out in 2016.

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