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Story so far from previous topics...
We are on an adventure to find how we can improve our chances of winning probability in this 'probability game' OKA 'trading in the share market'.
So far we discovered;
* Our chances with Random investment is not more than 30%
* If we invest in shares with growth potential and if we catch the correct timing our chances will be 30+10+10 = 50% (we are on the fence)
We discussed the above in the following thread and related other discussions.
http://forum.srilankaequity.com/t10022-secret-of-harnessing-the-intrinsic-value-to-gain-profits#69373
Let's continue our journey. For this discussion, I would like to consider another variable from my 4-variable model: 'Share price'.
==============================================================
Share price is (one of) the most discussed and most closely monitored aspect(s) of a share in the market by the 'crowd'. The price is the key to making profits. No wonder many people put lot of efforts to predict the movement of share prices. But, more often than not, majority fail to identify the correct movements.
First of all; why prices move? Who moves the prices?
Can there be an "Invisible Hand" which move the prices?
My answer to the last question may be a little shocking.
My answer is...
.
.
YES!
Yes, in my view, there is an invisible hand behind most of the price movements in the market.
If so, what is this hand? How can we recognize it?
Let's take an example.....
Have you played with a Yo-Yo when you were small?
Never mind, I will make it simpler with a hypothetical experiment.
EXAMPLE:
Imagine a weight (let's consider a Yo Yo or a spin top Or a Tennis ball) tied to one end of a strong rubber (elastic) band (about one foot long).
Now suppose, you are holding one end of the band and the weight (Yo Yo) is just hanging below on the other end.
Imagine you are holding your hand about two feet above the ground; then, the Yo Yo is about one foot above the ground. At this stage, I call the yo yo is at its 'equilibrium level'
OK?
Now, let's move your hand slowly upward about one foot from its initial position. What will happen to the yo yo?
It will also follow the hand movement. The pattern of movements of the hand and the Yo Yo will be almost identical. When the hand moves, yo yo will move. When the hand stops, yo yo will also stop. Only difference is that the hand is one foot above the yo yo. When you have stopped, now, the yo yo is hanging one foot above its original position (or other words, in its 'new equilibrium level').
OK so far?
Now, let' try again; this time, move the hand one foot up with a jerk; forcefully, vigourousely and as quick as we can. LET'S do it NOW!
What will hapen to the yo yo this time?
When we do that, all of a sudden, lot of things will come in to play: the force applied by your hand, the elasticity of the rubber band, the weight and the momentum of the yo yo, the gravitational force acted upon the yo yo etc etc.. (Don't worry much about my scientific jargon
)
So, when you swing up your hand, initially, the yo yo will show some resistance which will make the rubber band to strech.
Then, the band will pull the yo yo up.
Will it stop when the hand is stopped? NOPE, the yo yo will, most probably,
go higher than the hand itself.
Then, it will come down, then up again; there will be 3~4 up and own cycles beore settling down at the new 'equilibrium level'.
After a while, the whole system (hand, band and yo yo) becomes calmed down.
If you swing the hand again, the same process will repeat.
(Hope we are clear on my hepothetical experiment.)
END OF EXAMPLE.
Now,
have we exerienced any share price movements similar to the yo yo movements in our experiment? (Both smooth slow and steady, as well as jerky and violent swing movement.)
If yes, let's continue.
(If no, please observe the market, when it becomes yes for you, let's continue).
Then, the Million Rupee quesion is; if there is an invisible hand behind these movements, what is it and how we can identify it?
In other words, what is the force which makes a share to move out from its 'equilibrium price level'?
I call this force 'the perceived value'.
.
.
What is perceived value?
Let's quickly take another simple example.
EXAMPLE
All of us have seen bricks; right? (Used for construction work).
Say, the market price of a brick is Rs 10/-
OK.
Imagine someone brings you a brick and asks you to buy that. How much are you willing to pay?
Obviousely Rs 10/- or less. Correct?
That means your perceived value of that brick is Rs 10/-
NEXT.
Imagine, somehow, you get to know that, there is a gold coin hiding inside the brick.
How much are you willing to pay for the brick now?
Obviousely a lot more than Rs 10/-.
Correct?
That means your perceived value now is higher (say Rs 1,000/- or so compared to 10/- earlier).
The brick never changed, but the information you had (about the brick) changed witch ultimately lead to a change in your 'perceived value'.
Make sense?
END OF EXAMPLE.
Now, in the market, hardly anybody use the term 'perceived value'. But there are terms like; intrinsic value, future value, fair value etc etc.
If we ask 10 experts about the value of a share, we may, most of the time, get almost 10 different answers.
So I say, different people have diferent 'perceived values' of a share.
However, in general, there could be an average 'perceived value' which leads to an average 'equilibrium price level'.
If this average perceived value is changed, it will lead the equilibrium price to change; just like the yo yo.
(What makes the 'perceived value' to change seems out of todays scope of discussion; probably we can discuss it some other day)
Now let's discuss business:
What I suggest is, when we buy a share, our buying price should be less than the 'average perceived value' of that particular share.
How to calculate the perceived value?
There are many ways. Different people use different methods. Some may use the book value, some may use P/E ratio, some may use PEG ration sme may use combination of those, etc etc.
To make things simple, my suggestion is, use WHATEVER the method make SOME sense to you. It can be some kind of our own foolish method. Doesn't matter.
'Using some method' is far better than not using anything at all. (Something is better than nothing!)
Belive me, if used properly, value based investing can bring us lifetime earning. There have been some legendary investors (such as Ben Graham - supposed to be a teacher of Warren Buffet) who used just this method to do wonders.
Anyway, let's not get into extremes. Let's just assign our 'foolish' method a fair percentage of winning probability.
Can we agree upon 10% ?
That means, if we decide to buy a share only if the price is less than the 'average perceived value', then our winning chances will be 10% higher.
To finish things, putting all together, what we discussed earlier;
If we buy only 'potential to grow' shares and buy only durng ideified time frames and buy only at a price below 'average perceived value', then, our chances of making profit will become 30+10+10 = 60% !!!
BINGO!
Now we have found the crucial atom to initiate the nuclear chain reaction. Now we have enough odds to make profits consistantly.
We have turned the table to our side.
Finally, we are not at mercy of the random market behaviours.
.
.
If you think, 60% is good enough to make all the difference, and satisfied with it, you may stop here and do your wonders
in the market. Wish you all the best!
Those who are not satisfied with 60%, those who want to be 'dead sure' in whatever you do, those who want more adventure;
let's continue our quest for finding more bent coins.
.....
We are on an adventure to find how we can improve our chances of winning probability in this 'probability game' OKA 'trading in the share market'.
So far we discovered;
* Our chances with Random investment is not more than 30%
* If we invest in shares with growth potential and if we catch the correct timing our chances will be 30+10+10 = 50% (we are on the fence)
We discussed the above in the following thread and related other discussions.
http://forum.srilankaequity.com/t10022-secret-of-harnessing-the-intrinsic-value-to-gain-profits#69373
Let's continue our journey. For this discussion, I would like to consider another variable from my 4-variable model: 'Share price'.
==============================================================
Share price is (one of) the most discussed and most closely monitored aspect(s) of a share in the market by the 'crowd'. The price is the key to making profits. No wonder many people put lot of efforts to predict the movement of share prices. But, more often than not, majority fail to identify the correct movements.
First of all; why prices move? Who moves the prices?
Can there be an "Invisible Hand" which move the prices?
My answer to the last question may be a little shocking.
My answer is...
.
.
YES!
Yes, in my view, there is an invisible hand behind most of the price movements in the market.
If so, what is this hand? How can we recognize it?
Let's take an example.....
Have you played with a Yo-Yo when you were small?
Never mind, I will make it simpler with a hypothetical experiment.
EXAMPLE:
Imagine a weight (let's consider a Yo Yo or a spin top Or a Tennis ball) tied to one end of a strong rubber (elastic) band (about one foot long).
Now suppose, you are holding one end of the band and the weight (Yo Yo) is just hanging below on the other end.
Imagine you are holding your hand about two feet above the ground; then, the Yo Yo is about one foot above the ground. At this stage, I call the yo yo is at its 'equilibrium level'
OK?
Now, let's move your hand slowly upward about one foot from its initial position. What will happen to the yo yo?
It will also follow the hand movement. The pattern of movements of the hand and the Yo Yo will be almost identical. When the hand moves, yo yo will move. When the hand stops, yo yo will also stop. Only difference is that the hand is one foot above the yo yo. When you have stopped, now, the yo yo is hanging one foot above its original position (or other words, in its 'new equilibrium level').
OK so far?
Now, let' try again; this time, move the hand one foot up with a jerk; forcefully, vigourousely and as quick as we can. LET'S do it NOW!
What will hapen to the yo yo this time?
When we do that, all of a sudden, lot of things will come in to play: the force applied by your hand, the elasticity of the rubber band, the weight and the momentum of the yo yo, the gravitational force acted upon the yo yo etc etc.. (Don't worry much about my scientific jargon
)So, when you swing up your hand, initially, the yo yo will show some resistance which will make the rubber band to strech.
Then, the band will pull the yo yo up.
Will it stop when the hand is stopped? NOPE, the yo yo will, most probably,
go higher than the hand itself.
Then, it will come down, then up again; there will be 3~4 up and own cycles beore settling down at the new 'equilibrium level'.
After a while, the whole system (hand, band and yo yo) becomes calmed down.
If you swing the hand again, the same process will repeat.
(Hope we are clear on my hepothetical experiment.)
END OF EXAMPLE.
Now,
have we exerienced any share price movements similar to the yo yo movements in our experiment? (Both smooth slow and steady, as well as jerky and violent swing movement.)
If yes, let's continue.
(If no, please observe the market, when it becomes yes for you, let's continue).
Then, the Million Rupee quesion is; if there is an invisible hand behind these movements, what is it and how we can identify it?
In other words, what is the force which makes a share to move out from its 'equilibrium price level'?
I call this force 'the perceived value'.
.
.
What is perceived value?
Let's quickly take another simple example.
EXAMPLE
All of us have seen bricks; right? (Used for construction work).
Say, the market price of a brick is Rs 10/-
OK.
Imagine someone brings you a brick and asks you to buy that. How much are you willing to pay?
Obviousely Rs 10/- or less. Correct?
That means your perceived value of that brick is Rs 10/-
NEXT.
Imagine, somehow, you get to know that, there is a gold coin hiding inside the brick.
How much are you willing to pay for the brick now?
Obviousely a lot more than Rs 10/-.
Correct?
That means your perceived value now is higher (say Rs 1,000/- or so compared to 10/- earlier).
The brick never changed, but the information you had (about the brick) changed witch ultimately lead to a change in your 'perceived value'.
Make sense?
END OF EXAMPLE.
Now, in the market, hardly anybody use the term 'perceived value'. But there are terms like; intrinsic value, future value, fair value etc etc.
If we ask 10 experts about the value of a share, we may, most of the time, get almost 10 different answers.
So I say, different people have diferent 'perceived values' of a share.
However, in general, there could be an average 'perceived value' which leads to an average 'equilibrium price level'.
If this average perceived value is changed, it will lead the equilibrium price to change; just like the yo yo.
(What makes the 'perceived value' to change seems out of todays scope of discussion; probably we can discuss it some other day)
Now let's discuss business:
What I suggest is, when we buy a share, our buying price should be less than the 'average perceived value' of that particular share.
How to calculate the perceived value?
There are many ways. Different people use different methods. Some may use the book value, some may use P/E ratio, some may use PEG ration sme may use combination of those, etc etc.
To make things simple, my suggestion is, use WHATEVER the method make SOME sense to you. It can be some kind of our own foolish method. Doesn't matter.
'Using some method' is far better than not using anything at all. (Something is better than nothing!)
Belive me, if used properly, value based investing can bring us lifetime earning. There have been some legendary investors (such as Ben Graham - supposed to be a teacher of Warren Buffet) who used just this method to do wonders.
Anyway, let's not get into extremes. Let's just assign our 'foolish' method a fair percentage of winning probability.
Can we agree upon 10% ?
That means, if we decide to buy a share only if the price is less than the 'average perceived value', then our winning chances will be 10% higher.
To finish things, putting all together, what we discussed earlier;
If we buy only 'potential to grow' shares and buy only durng ideified time frames and buy only at a price below 'average perceived value', then, our chances of making profit will become 30+10+10 = 60% !!!
BINGO! Now we have found the crucial atom to initiate the nuclear chain reaction. Now we have enough odds to make profits consistantly.
We have turned the table to our side.
Finally, we are not at mercy of the random market behaviours.
.
.
If you think, 60% is good enough to make all the difference, and satisfied with it, you may stop here and do your wonders
in the market. Wish you all the best!
Those who are not satisfied with 60%, those who want to be 'dead sure' in whatever you do, those who want more adventure;
let's continue our quest for finding more bent coins.
.....
Last edited by hunter on Tue Sep 20, 2011 10:40 pm; edited 4 times in total
You have such a excellent teaching skill. Wish you conducted some 
)
