Dearest readers, what is a good price of a given stock? What is a great value of a stock? Sometimes, these two questions have the same answer, other times they have different ones. As we seem to be experiencing the same retail investment (retail investment meaning people investing directly, by themselves often with "small" account sizes) fever as the people did a century ago during their Roaring 20's, so many of us are wondering what is good value or the right price for real-estate, stocks, ETF's, commodities, crypto and so on. When is something overvalued, when is it undervalued, when is the time to go in and the time to get out and lock in those sweet sweet profits? The truth is, if there is anyone out there who can figure this out across different markets and with total accuracy, they are either a time traveler or beyond intelligent and resourceful; also, they do not reveal themselves to us mere mortals haha. That said, I would like to share with you another portion of my journey to learn about investing, trading, the markets- all with the end goal of developing a mindset that might give me enough of an edge in the near future. Here, I offer some ideas about value and prospecting for entry and exit points. No strategies, no indicators, all mindset because I am very much into the mindset part. Oh, and before you start thinking this will be a boring post, please read the short paragraph below.
According to a BNN article from December 9th, 2020: "DoorDash’s shares opened at US$182 after the company priced them at US$102 each. They closed at US$189.51, almost 86 per cent higher than the listing price." Bloo-dy Hell! Wow! I mean, bloody hell and wow for those who got it at $102 each, not so hot for the last people who got it at $189.51! Yet, if no one buys it at $189.51, it will never reach $200, $300, $400, $1,000... Do I think I know entry and exit "signals"? Do you think you know them? The $102 people know a lot more- their IPO purchase stipulates how long they have to wait before they can sell so they do not end up crashing the stock price way too early, or at all. So, they know they will profit but not by how much- though it will likely be by a lot. They have their edge. So, what value in this stock is there for the rest of us? Where is our edge?
Interested now?
The first thing I did was look at a few different theories of value. Out of those that I read about, the one that stuck with me the most was the Subjective Theory of Value. This theory states that, basically, an item’s value depends on the consumer. So, an item's value does not depend on the labour, resources put into it or on any of its inherent properties; it depends on a consumer's wants and needs, and on that item's marginal utility- the belief that the consumer gets more utility and value out of an item than what they traded or paid for it. So, for example, an Android phone priced at $1,000 is worth to us more than $1,000, or else we deem it too expensive and we do not buy it. If we do not buy it, all the work effort and resources that went into developing and making it mean nothing except they are a loss and/or a costly lesson to those participating in making it and selling it. Also, in order to profit and have an actual business, the company pulling everything together to make the smartphone has to value it at a higher price than what it costs to make, or else it is once again a loss and/or a costly lesson. That is the gist of Marginalism, another theory that goes together with Subjective Theory of Value. Now, while I like this theory and currently it is helping me shape my stock market and real estate mindsets, I was not born yesterday and I know that other forces influence this such as monopolies (products and services), supply and demand (real estate), and market makers (stock market). Of these three, I have begun to learn what market makers do and recommend you learn it as well before you start trading stocks, or continue trading stocks. Overall though, I still see this as a solid foundation for understanding the stock market.
Let me try to put it into stock market and stock trading terms. IPO's (initial public offerings) need to be done at a price and volume that are a good deal for the company; The investors at IPO stage and after the company goes public need to believe that the shares of a company stock will be, at some point, worth more than the price at which they buy them. Otherwise, an IPO cannot happen and the company will not go public. If, at any point, it does go public and hopeful investors drive the price up, there will be catalysts that will send the price going sideways or going down, then hopefully going up again. So, according to the Subjective Theory of Value, the shares of a stock you hold are going to lose value unless somebody else wants to buy them for more than you bought them for. Sounds simple, right? WRONG. It is NOT SIMPLE. If it was simple, I would understand it way sooner and many other people would understand it as well, yet that is certainly not the case!
Allow me to demonstrate. In a perfect world, equipped with the knowledge of this particular value theory, the idea is that if you buy a stock at $20 per share, you need to have a minimum exit price in mind but that is not all. You need to understand how to set that price. Normally, people say you set a stop loss below your entry price and you set your target profit at 2:1 or 1:1 or whatever else. Hmm, well, if you want to get out at $30, think about what that means through the lens of Subjective Theory of Value (and Marginalism). Through this lens, you see yourself eventually selling these shares at $30 to people who think, through analysis speculation or pure gambling, that in fact at $30 per share they are getting a great deal and they will get to profit as, according to them , the stock price will keep going up. Otherwise, they are not buying (in a perfect scenario; again people can miscalculate or get tricked). Also, looking through the same lens, it seems ridiculous for you to exit at $30 when those who are buying at $30 are expecting profit as well. So, equipped with this theory, your only logical choice is not to sell but to hold for more profit instead of giving that profit to people who buy your shares from you. In fact, as long as someone wants your shares for more than you spent on them, you can continue to hold. When do you sell though, according to this theory? Hard to say. My best idea so far is to not set the target price that is your maximum profit expectation because you do not know it- only your buyers know that number. Rather, you set a minimum expected profit target. If the stock price goes beyond your target and then pulls back down to it, it is perfectly ok to sell at that point in time or even sooner. On the other hand, if the stock misses your price target and then goes below your original price, what does that tell you? It tells you that, at that time, no buyers believe your shares are worth $20. At that point, the theory suggests you need to cut your losses fast. Remember, you buy something because you expect more value out of it than what you paid for it, and in case of stocks the value to you is a higher share price. So, you by definition cannot accept holding on to something that goes against the theory, if you in fact believe in it to be valid for the stock market. You can tolerate the stock going down somewhat because, in the real world, there are other forces at play that may have caused your stock to temporarily go down below $20 per share. Or, maybe the goal of these forces is to cause something more permanent and more devastating to your goals. Which one is it? That boils down to your loss tolerance, be it potential or real loss. If your stock goes down, though, just remember this. You bought it expecting profit, and potentially a lot of it. Never, ever forget that. Figuratively etch that in stone.
Why did I say earlier that this seems simple but is not simple at all? It is because people are not doing it. What is trending on social media are concepts like HODL (hold on for dear life), diamond hands (keep holding, do not let go of your stock crypto etc.), cutting profits short (exiting trades early) and so on. In the stock market, according to the theory, you only want to hold that which most people looking at it want more right now than they did when you got it in the past. I think many people do not want to even explore accepting this premise because cutting losses quickly will result in- well- losses. Oh, and how we hate to lose! People think that if you lose, it means you are wrong and a loser and you do not know anything. Thankfully, not everyone thinks that. When you look at theories of value, you understand that cutting your losses quickly is intelligent damage control and should be appreciated a lot more because not every loss is the same. Also, every loss is a new lesson to learn so you can do better in the future.
And so my journey to the ideal trading and investing mindsets continues. Where are you at in your journeys? Or, are you more hands on, live and learn type of person? Hope you find this useful and share some comments if you like. :)
According to a BNN article from December 9th, 2020: "DoorDash’s shares opened at US$182 after the company priced them at US$102 each. They closed at US$189.51, almost 86 per cent higher than the listing price." Bloo-dy Hell! Wow! I mean, bloody hell and wow for those who got it at $102 each, not so hot for the last people who got it at $189.51! Yet, if no one buys it at $189.51, it will never reach $200, $300, $400, $1,000... Do I think I know entry and exit "signals"? Do you think you know them? The $102 people know a lot more- their IPO purchase stipulates how long they have to wait before they can sell so they do not end up crashing the stock price way too early, or at all. So, they know they will profit but not by how much- though it will likely be by a lot. They have their edge. So, what value in this stock is there for the rest of us? Where is our edge?
Interested now?
The first thing I did was look at a few different theories of value. Out of those that I read about, the one that stuck with me the most was the Subjective Theory of Value. This theory states that, basically, an item’s value depends on the consumer. So, an item's value does not depend on the labour, resources put into it or on any of its inherent properties; it depends on a consumer's wants and needs, and on that item's marginal utility- the belief that the consumer gets more utility and value out of an item than what they traded or paid for it. So, for example, an Android phone priced at $1,000 is worth to us more than $1,000, or else we deem it too expensive and we do not buy it. If we do not buy it, all the work effort and resources that went into developing and making it mean nothing except they are a loss and/or a costly lesson to those participating in making it and selling it. Also, in order to profit and have an actual business, the company pulling everything together to make the smartphone has to value it at a higher price than what it costs to make, or else it is once again a loss and/or a costly lesson. That is the gist of Marginalism, another theory that goes together with Subjective Theory of Value. Now, while I like this theory and currently it is helping me shape my stock market and real estate mindsets, I was not born yesterday and I know that other forces influence this such as monopolies (products and services), supply and demand (real estate), and market makers (stock market). Of these three, I have begun to learn what market makers do and recommend you learn it as well before you start trading stocks, or continue trading stocks. Overall though, I still see this as a solid foundation for understanding the stock market.
Let me try to put it into stock market and stock trading terms. IPO's (initial public offerings) need to be done at a price and volume that are a good deal for the company; The investors at IPO stage and after the company goes public need to believe that the shares of a company stock will be, at some point, worth more than the price at which they buy them. Otherwise, an IPO cannot happen and the company will not go public. If, at any point, it does go public and hopeful investors drive the price up, there will be catalysts that will send the price going sideways or going down, then hopefully going up again. So, according to the Subjective Theory of Value, the shares of a stock you hold are going to lose value unless somebody else wants to buy them for more than you bought them for. Sounds simple, right? WRONG. It is NOT SIMPLE. If it was simple, I would understand it way sooner and many other people would understand it as well, yet that is certainly not the case!
Allow me to demonstrate. In a perfect world, equipped with the knowledge of this particular value theory, the idea is that if you buy a stock at $20 per share, you need to have a minimum exit price in mind but that is not all. You need to understand how to set that price. Normally, people say you set a stop loss below your entry price and you set your target profit at 2:1 or 1:1 or whatever else. Hmm, well, if you want to get out at $30, think about what that means through the lens of Subjective Theory of Value (and Marginalism). Through this lens, you see yourself eventually selling these shares at $30 to people who think, through analysis speculation or pure gambling, that in fact at $30 per share they are getting a great deal and they will get to profit as, according to them , the stock price will keep going up. Otherwise, they are not buying (in a perfect scenario; again people can miscalculate or get tricked). Also, looking through the same lens, it seems ridiculous for you to exit at $30 when those who are buying at $30 are expecting profit as well. So, equipped with this theory, your only logical choice is not to sell but to hold for more profit instead of giving that profit to people who buy your shares from you. In fact, as long as someone wants your shares for more than you spent on them, you can continue to hold. When do you sell though, according to this theory? Hard to say. My best idea so far is to not set the target price that is your maximum profit expectation because you do not know it- only your buyers know that number. Rather, you set a minimum expected profit target. If the stock price goes beyond your target and then pulls back down to it, it is perfectly ok to sell at that point in time or even sooner. On the other hand, if the stock misses your price target and then goes below your original price, what does that tell you? It tells you that, at that time, no buyers believe your shares are worth $20. At that point, the theory suggests you need to cut your losses fast. Remember, you buy something because you expect more value out of it than what you paid for it, and in case of stocks the value to you is a higher share price. So, you by definition cannot accept holding on to something that goes against the theory, if you in fact believe in it to be valid for the stock market. You can tolerate the stock going down somewhat because, in the real world, there are other forces at play that may have caused your stock to temporarily go down below $20 per share. Or, maybe the goal of these forces is to cause something more permanent and more devastating to your goals. Which one is it? That boils down to your loss tolerance, be it potential or real loss. If your stock goes down, though, just remember this. You bought it expecting profit, and potentially a lot of it. Never, ever forget that. Figuratively etch that in stone.
Why did I say earlier that this seems simple but is not simple at all? It is because people are not doing it. What is trending on social media are concepts like HODL (hold on for dear life), diamond hands (keep holding, do not let go of your stock crypto etc.), cutting profits short (exiting trades early) and so on. In the stock market, according to the theory, you only want to hold that which most people looking at it want more right now than they did when you got it in the past. I think many people do not want to even explore accepting this premise because cutting losses quickly will result in- well- losses. Oh, and how we hate to lose! People think that if you lose, it means you are wrong and a loser and you do not know anything. Thankfully, not everyone thinks that. When you look at theories of value, you understand that cutting your losses quickly is intelligent damage control and should be appreciated a lot more because not every loss is the same. Also, every loss is a new lesson to learn so you can do better in the future.
And so my journey to the ideal trading and investing mindsets continues. Where are you at in your journeys? Or, are you more hands on, live and learn type of person? Hope you find this useful and share some comments if you like. :)