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Tag Archives: investment strategy

Stocks- No Such Thing as Overvalued

02 Mar

With all these tech companies going public (LinkedIn, Pandora, Yelp ect.) I’ve been hearing the term “overvalued” a lot lately, but what does that term really mean? When someone says a stock is overvalued it’s important to keep in mind it’s just a matter of opinion. People say beauty is in the eye of the beholder. I would say value is in the eye of the beholder.  If you’ve ever watched the TV show Pawn Stars you’ll see continuous examples of this. A customer goes to the pawn shop to sell their grandmother’s shoelaces that are supposedly worth $1000. When Chum (a character from Pawn Stars) only offers them $5 they get offended and leave. The customer is mad because Chum thinks the shoelaces are overvalued at $1000. The thing to keep in mind is Chum has no idea how much the shoelaces will actually sell for. An item’s value is different for everyone.  This is why valuation is one of the hardest subjects to master.

How do we figure out the price on something if its value is different for everyone? Well, generally we go off its market value. It makes sense to me that market value is equal to the intrinsic value (real value plus outlying factors). An example of this is Yelp’s IPO. The real values of Yelp’s shares were evaluated at $15/share, but as soon as the markets opened the price shot up over 60% and closed at $24.58! This happened because the real value ($15) met with the outlying factors ($9.58) to create the market value ($24.58). I think it’s overpriced, considering they have never posted a profit, but just because I don’t see the value of the outlying factors doesn’t mean they aren’t there. That’s why I hate when people give specific stock picks. They have no clue what a stock is actually going to do. That’s why I think it’s better for people to use their own gut instincts when it comes to buying individual stocks. You might be in tune with some outlying factors that others aren’t.

If someone says a company is overvalued it means that they don’t see what the rest of the market see at that point in time. The real value and the value of the outlying factors are continuously changing. This means the stock’s intrinsic value  is always shifting. There is no way of actually knowing if a stock is overvalued, because it’s impossible know the future of its intrinsic value. There are so many outlying factors at work it’s incomprehensible to know them all. The only way you can even get close to knowing is if you are completely in tune with not only the company, but people’s perception of the company and their products. Anything short of that is pure speculation.

That being said, does anyone else feel like speculation is all we have left when it comes to investing in individual stocks?

 
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Posted by on March 2, 2012 in Uncategorized

 

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Sex Ratios & Men’s Finances- I Bet You Didn’t Know This

26 Feb

An academic study came out suggesting that men are less responsible with their finances when they live in an area with a male biased sex ratio (more men than women). The article is called The Financial Consequences of Too Many Men: Sex Ratio Effects on Saving, Borrowing, and Spending (from the journal of Personality & Social Psychology January 2012).  What the article comes down to is men spend more money when women are scarce. Now I’m sure the ladies love hearing stuff like this because it makes them feel special, and in all honesty it should. It shows that we need you, and are willing to go through extraordinary measures to get you.

When I first started reading this article I didn’t buy it. I always seemed to me that I spend way more money having a girlfriend then I would if I didn’t. All the dinners for two,  the vacations for two, and even filling up two gas tanks. No, this article had to be wrong. If men spend more money when women aren’t around then what are they spending it on?

As I read further, the picture began to fill itself in. Every man wants a woman. When there are more men than women it makes matching of partners impossible. Every man wants a woman, but they all can’t have one. So what do we as men do? Well, thousands of years ago we probably would have ran around beating our chests and killing each other to find out who’s the strongest. Since we can’t do that anymore (and women have more say in the matter), we go out and spend money to try and lure women into choosing us.

As it turns out, the more male biased the sex ratio, the more money women are expecting men to spend on them. If you can’t take them to a nice dinner and buy them expensive gifts they will find someone who can (I realize not all women are like this). So to prevent that from happening what do we do? We take on debt. So not only are we spending more but we also have more debt, and with more debt comes less savings; However, when the tides have turned (and there are more women than men), men spend less on their women.

I think this article is interesting because it shows us that there are underlying issues that affect our finances that we might not even think about. They use an example of two cities that are located close together, but their finances are completely different. The city that has more debt is the one with a male biased sex ratio. It’s an issue most of us would never have even thought about, but it seems like it could have a substantial impact. That’s why the study of psychology, sociology, and finance mixed together is so great. Have any of you heard about other psychological/sociological issues affect finances (I’m always looking for some good reading materials)?

 
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Posted by on February 26, 2012 in Uncategorized

 

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Forget Those Other Guys- Take Control of Your Own Finances

23 Feb

Can you believe all the crazy things that have happened within the last decade in the financial community? I’ve never heard about so many crooks within one industry; all the scandals have really affected my view on personal finance. I can’t turn on the news without seeing examples of people cooking the books or running Ponzi schemes. These really are unfortunate times. Luckily for us we can help ourselves when it comes to personal finance.

When I was looking up the definition of the word personal, many explanations came up. The one thing they all had in common is the word personal involves one person. I strongly believe that all the corruption in the finance world really shows us that everyone should take a hand on approach when dealing with their own finances. The days of having confidence that other people can take care of your money are over. Finance might not be the most interesting topic in the world (or even close to it), but it is one of the most important. People need to start educating themselves on their own investments and stop trusting others to take care of it for them. No one wants to lose everything because of financial greed. It’s a real life monster that will steal your heart and soul when you least expect it.

I understand it may not appear like an easy task, but you have a responsibility to yourself and your family to take care of your finances. Remember that no one will care about your money as much as you do. You don’t need to go off and start dealing in derivatives and swaps to make money; you can keep it simple and still be successful. I’m not ignorant to the fact that some people will continue to trust the wrong people. The way I see it, you already have enough market risks tied to your investments, so you don’t need to add risk by using an outsider to manage your investments.

For those of you that have no interest in managing your own investments I have one suggestion: Only use fee based financial institutions to manage your money. They have no ulterior motive when they give you advice. They aren’t making a commission by getting you to buy their products, and they won’t hedge their bets against you. I don’t think they are as good as taking responsibility for your finances, but they are definitely better than those other guys.

 
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Posted by on February 23, 2012 in Uncategorized

 

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