Simple And Effective Lesson On Investing

Value over premium written by TheKen. This article distribution service imposes rules that make the article below more difficult to breakdown and understand. please visit my blog to read this article with the correct spacings.

Introduction:

When people hear this famous phase, buy low sell high, their first reaction is an automatic "duh", of course!. Then they go ahead and do something that looks like the direct opposite of buy low, sell high.

Im sure every investor has, at some point of time, been defeated by his own emotions. This article is an attempt to arm the investor with a weapon of logic, so that he may be able to have a deeper understanding of the logic contained within those 4 famous words of "buy low, sell high" and more clearly apply it to his investing decisions.

Whats behind a share price: 1)Value 2)Premium. To buy a share, we pay for its value, plus a market premium determined by mr.market at that particular time. For example, the value of an oil & gas company can be assumed to be steadily increasing as the oil & gas industry enjoys the huge increase and sustained demand for oil. Which has also raised oil prices to its highest ever.

The premium of this same company however, changes according to whether theres news about it, whether the market is going up or down, whether its raining or not, whether there are buy calls or sell calls made by paid analyst for free....etc etc. It is surprising how many people are scared to buy when the value is obviously increasing and the premiums are still low !. They are missing the sweet spot to make a successful investment.

Value = what is the company worth now ? what is it likely to be worth in the future ?. Premium = mr.market's willingness or un-willingness to sell the share to you, this changes like the weather. Think of value as the truth. while premium is the hype. So now that i have talked about the 2 factors that makeup a share price, lets proceed to the 4 famous words

Summary:

Buy Low - Value increasing, Low premium. Sell High - Value declining, High premium. Thats the simple truth of buy low, sell high. Dare to invest when the values are increasing and the premium is still low. Mr.market can buy it back from you when the premium is sky high, but the values have started to go down.

This is the simple truth about making good investments, yet so many people keep waiting till the premiums increase before they buy and hold on to companies that are obviously declining in value.Pay as little premium as possible to get the good companies, but why do some people have to wait until everyone and his mother is buying before they dare to buy ?. Have the guts and trust in your investment picking abilities

A quick example here:

Homebuilders and subprime loan companies in late 2006 were still enjoying high premiums in their share price despite the rapidly weakening property market which was already degrading their value. Some fools were no doubt holding on to the shares while the smarter ones sold off quickly as soon as they saw what was happening.

Disclaimers:

Please make sure you have checked and double checked a company's value before buying into their shares.