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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 long can it last?

Equity Wobble US stock markets extended their recovery following a sharp sell-off at the start of the week. Mounting concerns over the spread of the Delta variant and its ability to interrupt a strong reopening and economic recovery resulted in the worst day for global stocks in some months on Monday. Since then, a string […]

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Equity Wobble

US stock markets extended their recovery following a sharp sell-off at the start of the week. Mounting concerns over the spread of the Delta variant and its ability to interrupt a strong reopening and economic recovery resulted in the worst day for global stocks in some months on Monday.

Since then, a string of upbeat earnings reports and some aggressive ‘buying the dip’ strategies revived market optimism.

Double Your Money

The S&P 500 has now doubled in value in just 15 months following the March 2020 Pullback: The second fastest double in history, second only to the 1932 reversal after the infamous 80%+ crash of the great depression.

It is worth noting that the cumulative earnings for companies within the S&P 500 is set to double over the same period.

The market hasn’t doubled for no reason despite what some market heretics proclaim.

A Closer Look

After a brief respite due to strong market rotation dynamics, the narrow breadth of the S&P 500 is back in focus. The S&P 500 is up 4% since June 3, but ~80% of that move can be attributed to just the largest five stocks. This concentration in returns is one to watch as narrowing breadth is a sign of internal weakness and can sometimes precede pullback periods.

Market Outlook

As we focus on the second half of the year, investors will undoubtedly be haunted by fleeting bouts of uncertainty. Echoes of ‘this surely can’t last forever’ screech louder and louder as markets continue to notch up all-time highs. This uncertainty and doubt is an inherent part of the human condition that even the most steadfast investor must grapple with.

Lately, market participants are constantly worrying about, well, everything. Their concerns range from inflation and the Delta variant to tech regulation and tensions with China. None of these fears are irrational, but they are part and parcel of any investment. While all these concerns could negatively impact markets over the near term, there is no reward without risk, and historically, it hasn’t paid to be a pessimist.

While the outlook is broadly positive, uncertainties remain, as mentioned above. Economic statistics have been consistently positive in recent times, but this positive news stream is now simply functioning to maintain the current levels of market exuberance.

As we advance, it won’t be enough to say that businesses are recovering, and earnings are increasing. The market will need to hear about a stable recovery and more robust future earnings to come. As a result, market participants will be far more sensitive to any negative news, fuelling the fragility and volatility in the most exposed sectors of the market.

My overarching view is that economic recovery will persist, and upside remains, fuelled by higher earnings, fiscal stimulus, and low interest rates. With that said, pullbacks and market rotations are likely, and any deviation away from this base case scenario will create a painful environment for those holding the most speculative names.

As always, caution and patience are the order of the day.

For investing tips, go to www.theislandinvestor.com.

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Property & Finance

Tips to manage your home in the heatwave

By Ted Healy of DNG TED HEALY Our recent spell of good weather is certainly welcome but it does lead to some practical problems in the home. With the mercury rising to 30 degrees in some areas and night time temperatures ‘dropping’ to only 19 degrees, we find ourselves doing everything in our power to try and […]

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By Ted Healy of DNG TED HEALY

Our recent spell of good weather is certainly welcome but it does lead to some practical problems in the home.

With the mercury rising to 30 degrees in some areas and night time temperatures ‘dropping’ to only 19 degrees, we find ourselves doing everything in our power to try and stay cool.

With weather advisory warnings in place for high temperatures, we have all found our homes are heating up!
While we are quite happy to fork out our well-earned Euro for that foreign trip to the sun to bake in the Mediterranean heat, we now find ourselves in the unusual position of the good weather visiting us for a change!

While it is easy to enjoy the sunshine from the swimming pool in Portugal or the beach in Spain it is a different story when walking into your hot house at home.

Unfortunately, the large majority of us don’t have the luxury of air-conditioned homes as much of the new building technologies we have experienced revolve around heating our homes. We now find ourselves looking for ways to cool them down!

While the natural reaction is to open the windows, it is recommended to keep windows, blinds and curtains closed as this will keep the hot air out. If opening them, make sure to do so at opposite ends of the house to create an airflow throughout.

To circulate cool air inside, fill up some bowls with water and ice and place them in different areas of the house – in front of a fan works best if you have one.

Another simple but effective option is to cook outside. Use the BBQ as the oven generates heat inside the house.

Trying to get to sleep at night can be particularly difficult in soaring temperatures. Here is a novel tip to help you catch those z’s; consider freezing your bedcovers before going to bed!

It may sound daft but give it a try; strip the sheets, place in a bag and pop them in the freezer. When it is time to hit the pillow, simply put them back on and they will be nice and cool!

Also, try taking a cold shower before bed.

Any halogen light bulbs in the house will also create additional heat, so consider replacing with LED lights.

Open the attic hatch to keep the house as ventilated as possible, allowing heat to escape through the roof.

And finally turn off any appliances, like the TV, when not in use. Electrical appliances can give off a surprising quantity of heat, particularly while charging.

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