Recently I saw Peter Schiff’s video on Youtube and he was talking about the crisis we are in now. The video is about two years old and it is very interesting.
What makes it interesting is how accurately he predicts what is going to unfold and the clarity with which he explains everything.
Even more interesting is his take on wealth creation. He says that a lot of people talk about the wealth that has been created and say look at all the wealth that we have created. We really haven’t created any wealth, the value of our assets are appraising at a higher price.
This is a great way to explain the diffferent between value and price. Everyone understands this concept intuitively when it comes to every day purchases like cars and cookies. That is why you see people licking their lips when a dealer offers a rebate on a Honda Civic. It’s the same car at a lower price. When something has been offerred at a certain price for a long time, we associate a certain value with it. If there is a discount or rebate on it, the price comes down, but the value remains the same.
It is not so easy to value stocks, because there are just so many parameters that you must evaluate and most of them change every month. That’s why it becomes easier to get swayed by panic and greed also. When the price of a Honda goes down, you are still sure, the engine will start and the car will run 200,000 miles. But when the price of Apple stocks go down, you are not sure whether the stock price will ever recover. Sure, your Ipod will work, but will the price of Apple stock recover?
That’s why a good way to look at stock market crashes is to look at the companies in your portfolio and analyze their value. The topic of valuing stocks is a very vast subject in itself and the first step on the is to clearly see the difference between value and price.