Connect with us

Property & Finance

Price and value are not the same thing

Published

on

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.

Continue Reading
Advertisement

News

Pandemic policy changes have left us with skewed data figures

By Michael O’Connor They say history doesn’t repeat itself, but it often rhymes – at this point however, even the rhyming has stopped. The pandemic policy changes have left us […]

Published

on

0235914_M_O_Connor_1000x600.jpg

By Michael O’Connor

They say history doesn’t repeat itself, but it often rhymes – at this point however, even the rhyming has stopped.

The pandemic policy changes have left us with skewed data figures, manipulated comp stats and a remarkably unfamiliar backdrop resulting in immeasurable uncertainty amongst investors across the globe.

During times like this, it is best to break complex problems down to their simplest forms and concentrate solely on the most crucial variables.

And the most crucial variables in this case are inflation and Fed policy.

An infinite number of potential outcomes are possible over the coming months, but all will be derived based on the aggressiveness of future Fed adjustments and the persistence of inflation.

There will always be risk

There is no perfect scenario here. The inflation we are experiencing is the by-product of an overheating economy.

The cumulative net worth of US Households is now almost $150 Trillion, $80 Trillion more than it was 10 years ago. The US labour market currently boasts two jobs for every one person looking for work, and corporate earnings jumped 35% in 2021, the largest increase since 1950.

Simply put, there is more money in the system than ever before.

The supply side issues have been well documented, but if inflation is to be quelled, then the demand side of the equation needs to be solved.

This is where the Fed’s tightening cycle comes in.

The Fed cannot improve supply issues, but they can negatively impact demand by dampening the labour market and decreasing the amount of capital in the systems through higher interest rates.

This tighter monetary policy is expected to bring inflation under control, but as the Fed increases the speed of rate hikes, the odds of economic contraction also increase.

In short, the goldilocks scenario of a gradual decline in inflation while maintaining labour market strength, household wealth and corporate profits, remains a pipe dream.

To strip inflation out of the system, a period of economic contraction is a necessary evil.

Crucially, this contraction does not need to lead to a crippling recession or anything of the sort. The level of contraction we experience will depend solely on the Fed’s ability to strike a balance between cooling inflation and maintaining demand.

Only time will tell if they can successfully thread the needle.

Jumping back in

Before declaring an all-clear for stocks, investors need to believe we are at the peak of policy tightening and inflationary pressure.

Certainly, we are seeing signs of improvement from an inflationary standpoint. For example, wheat prices are now lower than at the beginning of the war in Ukraine – another showcase of the unpredictability of markets.

With that said, one crucial paradox remains. Investors want interest rates to fall so stocks can rise, but any fall in interest rates is unlikely if stocks rally, somewhat capping the recent upside.

Make a plan

As always, I encourage a long-term focus. Investors will be better served focusing on the bull market opportunity on the other side rather than overemphasising what may be left in the bear market.

Those looking to take advantage of any potential upside need to get their house in order. You need to take the time to develop a clear picture of what your allocation will look like, create a watchlist of preferred names and know your entry points.

Scrambling together a plan after the fact is a sure-fire way to ensure you miss the very opportunity you were trying to capture.

Learn more at

https://www.theislandinvestor.com/

Attachments

Continue Reading

News

Tenant’s termination notices have risen by 58%

By Ted Healy of DNG TED HEALY It has been highlighted this week that the number of termination notices issued by landlords to tenants has risen by 58% in the […]

Published

on

0235845_shutterstock1772208587.jpg

By Ted Healy of DNG TED HEALY

It has been highlighted this week that the number of termination notices issued by landlords to tenants has risen by 58% in the first six months of the year compared to the previous six months.

There were 2,913 termination notices issued in the first six months of this year compared to 1,845 in the last six months of 2021.

It is reported that 55% of those notices were for the purpose of sale of the property.

A ban on evictions during lockdown periods during the COVID-19 pandemic lowered the number of termination notices. However, the eviction moratorium was lifted in April 2021 and numbers have been rising significantly since then.

The figures, released by the Residential Tenancies Board, have been described as “very alarming and require urgent action”.

They highlight the ongoing crisis in the rental sector and make for stark reading. At the time of writing only four properties were advertised as being available for rent in Killarney on Daft.ie.

The exodus of private landlords from the market is a real concern and needs to be addressed. Landlords exiting the market in greatest numbers at present are those that in the past had charged rents that were less than market rates and are now only able to minimally increase rent on their properties because they are subject to Rent Pressure Zone rules.

The Government has extended Rent Pressure Zones until the end of 2024 and has prohibited any rent increase in a Rent Pressure Zone from exceeding general inflation or two percent, whichever is lower.

However, more needs to be done to entice private landlords to stay in the market and supply of available properties needs to be increased.

Continue Reading

Trending