Effective pricing is the key to financial success.

The factor that causes the price to be extremely lower than the value-psychology.

The most important discipline of investment is not accounting or economics, but psychology.

Buying at a price below value is the true meaning of investment-the most reliable way to make money.

Relationship between price and value (1)

Suppose you have realized the effectiveness of value investment and can estimate the intrinsic value of stocks or assets; Further suppose that your estimate is correct. This is not the end. In order to know what action needs to be taken, you must check the asset price relative to the asset value. Establishing a healthy relationship among fundamentals, value and price is the core of successful investment.

For value investors, price must be the fundamental starting point. Facts have repeatedly proved that even the best assets, if the purchase price is too high, will also become a failed investment. At the same time, few assets are so bad that buying them at a low enough price cannot turn them into successful investments.

When people categorically say "We only buy A" or "A is a great asset class", it sounds like saying "We will buy A at any cost … regardless of the prices of B, C and D, we must buy A first". There is no doubt that this is wrong. Any asset class or investment has no inherent high return, and it is attractive only when the price is right.

If I want to sell my car to you, you will ask the price first and then answer yes orno. It is foolish to make an investment decision without seriously considering whether the price is fair or not. But when people decide to buy something without careful consideration, they will do so, just like they did when they bought technology stocks in the 1990s (or when they just don't want to buy something, just like they didn't want to buy junk bonds in the 1970s and early 1980s).

In short, the idea of not considering the price is neither good nor bad!

Most importantly, in July 2003, 1.

The relationship between price and value (2)

If you buy something at fair value, you can expect a fair return considering the risk factors, which is the basic premise of the efficient market hypothesis-very reasonable. However, active investors are not looking for ordinary risk-adjusted returns, they need rich returns. If fair returns can satisfy you, why not passively invest in index funds and save a lot of trouble? So it's no big deal to buy securities within the value. It is obviously wrong to buy at a price that exceeds the value, because it takes a lot of effort and luck to turn what is bought at a high price into a successful investment.

Remember the beautiful 50 investment I mentioned in the last chapter? At the peak, the price-earnings ratio (the ratio of share price to earnings per share) of many large companies is as high as 80~90. (In contrast, the average P/E ratio of post-war stocks is generally around 15. Followers of these companies don't seem to worry about overvaluation.

Then, in just a few years, everything changed. In the early 1970s, the stock market cooled down. Under the cover of external factors such as the oil embargo and rising inflation, the situation is even more bleak, and the beautiful 50 shares plummeted. After a few years, the P/E ratio of 80~90 dropped to 8~9, which means that investors who invested in the best companies in the United States lost 90% of their funds. It is true that people buy shares in big companies, but the price they buy is wrong.

At Oak Capital Management, we say that "good buying is half the battle", which means that we don't spend too much time thinking about the selling price, timing, target or selling method of stocks. If you buy it cheaply enough, the answers to these questions are self-evident in the end.

If your estimation of intrinsic value is correct, then over time, the asset price will tend to be consistent with the asset value.

What is the company value geometry? In the final analysis, this is the problem. It is not enough to buy stocks just because of good ideas or good business. You must buy them at a reasonable price (or, if things go well, at a special price).

BUBBLE.COM, 65438+20001October 3rd.

The relationship between price and value (3)

All this leads to a question: how did the price come from? What should potential buyers check to ensure the correctness of the price? There is no doubt to consider the fundamental value, but in most cases, the price of securities is influenced by at least two other important factors: psychology and technology (which are also the main determinants of short-term price fluctuations).

Most investors, including most non-professional investors, know little about technology. Technology is a non-fundamental factor that affects the supply and demand of securities, that is, it has nothing to do with value. There are two examples: when the stock market crash causes leveraged investors to receive margin notice and be closed, forced selling will occur. When cash flows into the same fund, portfolio managers need to buy. In both cases, people are forced to trade securities regardless of price.

Believe me, there is nothing better than someone who will sell during the crash regardless of the price. Many of our best transactions were completed at this time. However, I would like to add two points:

You can't make a living by buying securities from forced sellers or selling securities to forced buyers; Forced sellers and forced buyers do not exist at all times, they only appear in rare extreme crises and bubbles.

Since buying from a compulsory seller is the most wonderful thing in the world, becoming a compulsory seller is the most tragic thing in the world. Therefore, it is very important to arrange your own affairs and ensure that you can hold on (not sell) in the most difficult period. To do this, we need both long-term capital and strong psychological quality.

This reminds me of the second factor that has a great influence on the price: psychology. Its importance cannot be overemphasized. In fact, it is so important that I will discuss investor psychology and the ways to deal with various psychological manifestations in the following chapters.

The key to determining value is skilled financial analysis, and the key to understanding the relationship between price and value and its prospect mainly depends on insight into the thinking of other investors. Investor psychology can lead to the pricing of almost any securities in the short term, regardless of its fundamentals.

The most important subject is not accounting or economics, but psychology.

The key is to understand people's likes and dislikes about an investment at present. Future price changes depend on whether more or less people favor this investment in the future.

Investment is a contest of popularity, and buying at the peak of popularity is the most dangerous. By then, all the favorable factors and opinions have been included in the price, and there will be no new buyers.

The safest and most profitable investment is to buy it when no one likes it. As time goes by, once a security becomes popular, its price can only change in one direction: up.

Random thoughts on identifying investment opportunities,199465438+1October 24th.

The relationship between price and value (4)

Obviously, psychology is another vital and extremely difficult field to master. First of all, psychology is elusive. Secondly, it brings ideological pressure to other investors, and psychological factors that affect their behavior will also affect you. As you will see in the next chapter, these forces often lead people to behave in the opposite direction to what is necessary to be a good investor. Therefore, in order to protect yourself, you must invest time and energy to understand the market psychology.

From the day you buy securities, you must understand that fundamental value is only one of the factors that determine the price of securities, and you must strive to make psychology and technology serve you.

Contrary to serious and cautious value investment, it completely ignores the relationship between price and value and blindly pursues bubbles.

All bubbles begin with an important fact:

Tulips are beautiful and rare (/kloc-Holland in the 0/7th century).

Internet will change the world.

Real estate can resist inflation and live permanently.

Several clever investors discovered (or foresaw) these facts and made a profit. Others then realized-or just noticed-that people were making money, so they followed suit and raised asset prices. However, with the further rise of prices, investors are stimulated by the possibility of making a windfall, and less and less consider whether the price is fair. This is an extreme reappearance of the phenomenon I once described: when the price of a thing goes up, people's love should drop, but in investment, their love tends to deepen.

For example, from 2004 to 2006, people may only consider the benefits of houses and apartments: realizing the dream of buying a house in the United States, fighting inflation, cheap mortgages and tax-free repayment, and finally reaching the recognized wisdom that "house prices will only rise." Everyone knows what accepted wisdom brings.

What is another notorious idea of "guarantee no loss"? In the era of technology bubble, buyers never worry about whether the stock price is too high, because they believe that someone is willing to spend more money to buy from them. Unfortunately, the big fool theory sometimes fails. Value finally comes into play, and those who take over will have to bear the consequences.

The advantage behind the stock may be true, but if you buy it at a high price, you will still lose money.

Advantages-and the huge profits that everyone seems to be enjoying-will eventually make those who resist at first surrender and buy.

When the last person can't persist in becoming a buyer, the stock or market will "top". Peak hours are often unrelated to the development of fundamentals.

"The price is too high" and "it will fall next" are completely different meanings. The price of securities may be too high and will last for a long time ... or even rise further.

In any case, value will eventually play a role.

BUBBLE.COM, 65438+20001October 3rd.

The relationship between price and value (5)

The problem is that during the bubble period, "attractive" became "attractive at all costs". People often say, "it's not cheap, but I think it will continue to rise because of excess liquidity" (or many other reasons). In other words, they said, "It has been fully valued, but I think the price will be higher." It is extremely dangerous to buy or hold on this basis, but this is how the bubble is formed.

In the bubble period, the obsession with market momentum replaced the concepts of value and fair price, and greed (plus the pain of watching others seem to have made a fortune) offset all the wisdom that should have dominated.

In a word, I believe that the investment method based on real value is the most reliable. In contrast, counting on something other than value to make a profit (such as making a profit from a bubble) may be the most unreliable method.

Consider the following possible ways to profit from investment:

Profit from the growth of the intrinsic value of assets. The problem is that it is difficult to accurately predict the growth of value. In addition, knowledge of growth potential usually pushes up asset prices, which means that unless you have a different view, you are likely to have paid the price for potential value growth.

In some investment fields-most notably private equity (acquisition of companies) and real estate-"leading investors" can devote themselves to improving asset value through active management. It is worthwhile to do so, but it is a long-term and uncertain process that requires a lot of professional knowledge. It can be very difficult to make progress, for example, in an already good company.

Use a lever. The problem here is that using leverage-borrowing capital to buy securities-will not make investment better, nor will it increase the probability of profit. It just magnifies the possible gains and losses. This method also introduces the risk of total collapse: if the investment portfolio does not meet the contract value, the lender can demand repayment when the price falls and liquidity decreases. Over the years, leverage has been associated with high returns, but it is also closely related to the most drastic plunge and crash.

Sell at a price that exceeds the value of the asset. Everyone wants a buyer who is willing to pay a high price for the assets he wants to sell. But obviously, you can't expect such a buyer to appear as you wish. Unlike underpriced assets rising to their fair value, the appreciation of reasonably priced or overpriced assets is based on the irrationality of buyers, so it is absolutely unreliable.

Buy at a price below value. In my opinion, this is the true meaning of investment-the most reliable way to make money. Buying at a price lower than the intrinsic value, and then waiting for the asset price to approach the value, does not require much talent, as long as market participants wake up and face the reality. When the market is in normal operation, the value will make the price rise strongly.

Among all possible ways to make profits from investment, buying at a low price is obviously the most reliable one. But even this may not work. You may have misjudged the current value. Or there may be an event that lowers the value. Or your attitude and market indifference lead to the securities being sold at a low price. Or longer than you wait for the price to match the intrinsic value. As Keynes pointed out, "the irrational state of the market is longer than the time you survived bankruptcy."

Buying below value is not foolproof, but it is our best chance.