Business advice

Let’s take a look at present versus future value
December 27, 2008, 3:11 am
Filed under: Blogroll, Business Advice

Value has been a hard concept to grasp since so many investment products (stocks, commodities and real estate property) have had their prices decrease so much.. The changes we are currently seeing are enough to confuse even veteran market watchers. I am not an analyst, but I can give you a good picture of how to get a handle on this.

Understanding present versus future value is a necessary if you are ever going to earn money investing. One basic concept of investing well is buying low and selling high. There one alternative is short selling. This is when an investor gambles on the idea that his stock, bond, etc., is going to go down in price. There are more ins and outs of this, but that is the basic principle.

The investment markets are more detailed since stocks are not only down in value, they are down so far as to make one wonder if and when they will ever rise again. Washington Mutual, before its takeover did fairly well. Currently, its stock is $.03. (One has to wonder why it is still being traded.)

Real estate and other potential investment products are so far down; it feels as they are not at zero, but in the deficit. There are properties in Southern California that have lost almost 50 percent of their previous value in less than three years. Yes, they still have a price tag in the positive on them by virtue of the tax assessor’s office, but they are down so far that it makes one wonder if the value is going to stay under the previous level permanently. (And, well, it might.)

So, you want to buy. It doesn’t matter what. Unless you are into gambling on options, another story, or shorting stocks, you want your purchase to climb in value. With the stresses pressed on our current economy, the values related by the tax guy, and listings, are a value that has been distorted because of outside circumstances that have never existed before. To top that off, there doesn’t seem to be anyone willing to hazard a guess as to when these ‘things’ are going to start going the other way.

So, let’s agree to conclude that current, present value has been distorted. We have to call it a real value because that is what the market is saying these investment options are currently worth. But are they? Are they only showing up this way because investors have slacked off their buying in many markets? When buyers hold back on buying for a time period, no matter what the reason, the market ends up with what the economists call pent-up demand. No one knows the whole story behind all the factors that make buyers do what they do. At some time, buyers will be tired of holding off. Then the prices will move up.

If you want to jump in the market, are you willing to wait until buyers start jumping in? Can you stand to wait until those prices move up? Then, comes another viable question that doesn’t seem to be addressed very often. How long are you going to hold your investment? It starts moving up. Great. Do you sell now? Once any item starts moving up in price, there is always a chance that it might move back down.

Many investors love to buy in when stocks plummet if they feel this is still a viable company and it will come back. Those are not wise gamblers today. Some of those stocks will either stay in the hole or disappear off the trading floor altogether.

Real properties may still be still standing in the lot, but do you want to be holding on to a devalued property if situations don’t change quickly? You could lock on to what you consider a great deal and end up holding it for years with little upward movement.

The overall wisdom is buy if you have finances that allow you to take high risks. Those who can gamble like this will come out like pirates eventually. The key word is eventually. Those who only hope the shift will change quickly and want to take a chance might be looking at a bigger wipe out than those left holding Washington Mutual’s stock.

What we have learned is that even though the market isn’t saying it, investment products are in a deficit in many niches. Before you can make profits anywhere near what’s happened in the past, an investor will have to wait for the selling price to come back up to what might be called a break-even point. (This does not mean a price we have previously seen.) Recognize this and take it into account when you invest.

Oh yes, if prices do decrease even more, you haven’t lost money, because you are not currently selling. Present values go up and down all the time. We just haven’t seen this much down. If investing, do all you can to keep your eye on the market. Make this decision before investing a penny. When are you are going to sell if it moves up and when are you dumping it if things get worse. (It meaning an investment product.)

All investors are envisioning a higher future value than the current price for their holdings. In our market, it is just going to take longer. It doesn’t mean you should stop investing. It just means that you should do more homework before buying and take a harder look at what you can afford.

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1 Comment so far
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Great article. I agree that people need to do their due diligence before jumping into the fire.

Comment by Don Sabatini

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