"Price is what you pay, value is what you receive." -Warren Buffett
This is not an article about value investing. It is up to each person to decide the approach he or she takes. Here, we are also going to focus upon investing, and not trading. Obviously, for those engaged in trading, price is the true criteria. The rest is basically noise.
That said, we need to realize that fortunes are not made by looking at price. Ultimately, that tells us nothing. Yet, for some reason, most seem to pay a lot of attention to it. Could this be the reason why the 99% never get anywhere?
If we want to succeed in a big way, we need to do things differently from the masses. Since they are concerned about price, we will look elsewhere.
Before getting started, it does need to be said that price if applicable when looking at buying or selling. Entry points can be important. A terrific opportunity might be less so at an elevated price. However, if we are looking at things long-term, it becomes less of an issue. Nonetheless, we cannot ignore it totally since, as we all know, markets can go insane.
Price Tells Us Nothing
Markets are driven by fear and greed. These are the two emotions. It is why we see bi-polar behavior (known as volatility). If you disagree, just look at the emotions of most in chatrooms or groups concerning particular investments. Notice the glee during bull runs or the despair (depression) during bear markets.
Those of us in cryptocurrency know these signs all too well. People seem to pull back their activity when things are falling, the exact opposite of what they should be doing. Once again, it is evidence of why most do not succeed.
We need to do things differently.
Looking to the insane for validation of our decisions is the wrong move. Since we understand markets to be this way, why do we look to them for anything. History shows that markets price everything wrong, most of the time.
Take any asset and look at the market price. There is a strong chance it is either too high or too low. It is never right. This is shown by the fact that within a few weeks, we will likely see the price of that asset move a considerable amount in either direction. If that is the case, why didn't the market price that in to begin with.
Now we must be clear here: we are not saying to argue with the market. The best way to blow up a trading account is to tell the market it is wrong. We see the same concept for investing. Markets do what they will. It is up to us to adapt and maneuver around the insanity it throws at us.
Many alleviate this issue by engaging in Dollar Cost Averaging (DCA). When one finds something he or she is optimistic about, a sound way is to buy over time. This takes some of the fluctuations of the market out by getting the price at different levels.
Either way, we have to have the belief in what we are investing first.
Find the 5 Year Success Story
What is going to be a success 5 years from now?
This is a way to approach things that will usually lead to growing one's account. Buffett likes to say the best stocks to buy are those you never want to sell. This same is true no matter what the asset.
Take Bitcoin as an example. Many feel this is something to HODL forever. With the ability to collateralize, it is becoming a reality. One can hold Bitcoin and never sell it. This can be leveraged for liquidity to enter other deals while also enjoying the long-term price appreciation.
Of course, there is nothing that says our timeline has to be 5 years. This is a mental framework. Sometimes we buy something with the intention of holding it a year or two. Also, there are times when situations change and the time to move on quickly presents itself. Being married to an investment to the point of blindness is not smart either.
It should go without saying that the barometer used should not be price. There are always signs of other issues that we should be focused upon. The price of Sears collapsed over the last decade. However, that was a sick company long before the stock started tanking. If one was aware of the shift in the industry, with the threat of online, the view was clear well before the price headed south.
When focusing long term, one can decide the entry points. For example, there are times when markets run. I recall many "true" real estate people looking at the prices in 2004 and laughing. They were buying nothing because the risk/reward wasn't there. The market ran too far and the numbers didn't make sense.
Who was doing the buying? All the people from the real estate seminars and courses who truly had no idea what they were doing. Their model of success was the greater fool theory. Once the prices reversed, they got crushed.
And guess how was still liquid to scoop the properties up at a discount.
The ones who make money know the value of what they are looking at. The price might not reflect what they see. In fact, it rarely does. For this reason, when the market is disgruntled about something, they are buyers. At the same time, when excess is occurring, they stand on the sidelines.
Do you think most do this? We all know the answer.
If we want to be successful, we need to understand how to approach things differently. The market will not tell us what a sound investment is versus one that is not. Price tells us hype or a lack of attention.
Remember this the next time you are tempted to judge the value of something based upon the price action.
Look at the Buffett quote at the beginning of the article to remind yourself.
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