Value vs Price

If I say that from tomorrow the membership goes up to 50k/month instead of 5k/month – you would all be hoping that the value might be going up 10x cox this is not an inflation adjustment this is a new promise.

But what if the value doesn’t change?

What if I am giving the same content?

You would be unhappy right? Yes, but only if you can’t sell the membership to someone else. If you had the option to sell it to someone else, then you would be happy cox you made a capital gains.

See the value remained the same but the price went up! And you are happy cox you were able to find a good exit. Right?

Whenever thinking about stocks, think the same way.

If you had to keep it or wanted to buy more and the stock rallies, its not good for you. If you want to sell it off, it’s the best thing that has happened to you.But our brains make us think differently!

We think if its going up, its good and if its coming down, its bad!It’s the reverse guys!

The core assumption in this example was that the value that I give remained the same. In market sense, its like saying the valuation remained the same.

Recap: What affects the value?

Earnings and interest rates!

Both of it can go down and up – impacting the valuations.

if the earnings go up, or are expected to go up, the value for the people staying invested also goes up! If the earnings go down, or is expected to go down, the value for the people staying invested goes down!

The market reflects that.

If the interest rates go up or are expected to go up, the value for holders come down and vise versa.

Just one last thing.

The value will go up far higher if the stock’s earnings are going up and the interest rates are falling.

Double whammy!

Same for the downside.

Tip: Whenever thinking about value, in your head, divide the two.

To do better valuation and finding a decent idea about when to sell / buy a stock, move one variable (earnings or interest rates) and keep the other same. Otherwise you will keep guessing and never reach a conclusion.

Lets keep the interest rates same, and value a company. In this assumption, the interest rates in the foreseeable future is going to remain the same.

Coming back to the example.

If the stock has tripled (from Rs100/sh to Rs300/sh) and there is no change in the interest rates then either the stock was undervalued at Rs100 or the market is assuming three times earnings in the future.

Do you think its happening?

If you think that earnings will triple in the future, you can keep the stock – if not, you should sell it!

It is not that complicated – we make it complicated!

Again, the earnings have to go up or there has to be reliable expectation of the earnings growth in the future. If there are none, the stock is overpriced.

Selling it makes more sense than buying it!

Don’t let your mind play tricks on you! Instead of selling it, our mind thinks buying more!

Another trick you mind plays is that when you sell, you expect it to come down otherwise you feel that you made a wrong decision.

You should never expect that the stock will start to come down after you sell it. This hardly happens! Its not market’s job to make you feel comfortable.

What you need to understand is that according to your understanding or the (parhe likhe ) people around you, thinks that its not worth it!

If its not worth it so why do you have it? Just cox your mind is playing tricks that it is going up and it might keep going up and you are scared to sell or you won’t find another stock like this are incorrect reasons to hold it!

Did it help?