{"id":24244,"date":"2011-10-03T23:31:10","date_gmt":"2011-10-04T03:31:10","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/10\/03\/what%e2%80%99s-the-biggest-mistake-most-investors-make\/"},"modified":"2011-10-03T23:31:10","modified_gmt":"2011-10-04T03:31:10","slug":"whats-the-biggest-mistake-most-investors-make","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/10\/03\/whats-the-biggest-mistake-most-investors-make\/","title":{"rendered":"What\u2019s The Biggest Mistake Most Investors Make?"},"content":{"rendered":"

By MoneyMorning.com.au<\/strong><\/p>\n

You might be one of those investors who have been wondering whether now is a good time to look for cheap stocks. At a time like this – with the stock market breaking below 3840 this morning – it’s important to understand the difference between the intrinsic value and the price<\/u> of a company. <\/p>\n

This is something most investors simply can’t do.<\/p>\n

<\/span>
\nWhen you estimate intrinsic value you’re estimating what a company’s really worth. It’s different to its share price, which is based on Mr Market’s emotional judgement – not rooted in sound knowledge of a company’s financial position or business fundamentals. <\/p>\n

But that’s not to say the share price isn’t useful. It is. Because it gives you the chance to buy a company when it’s trading below its real value and sell it when it’s trading at a premium.<\/p>\n

Put simply, price is what you pay and value is what you receive. <\/p>\n

A stock’s price<\/u> is based on the market’s assessment of its value<\/u>. More often than not, this assessment is distorted by the prevailing sentiment – either too much optimism or pessimism. This means price and value often differ wildly. <\/p>\n

And when you’re under the influence of sentiment, it can lead you to either buy a company well in excess of its value, or sell below its value. That is, fear and greed can lead you into making the wrong decisions at exactly the wrong time. <\/p>\n

One tool I use in Sound Money. Sound Investments<\/a><\/em> to help you see past the sentiment and assess whether a company is undervalued by the market is the price-to-book (P\/B) ratio.<\/p>\n

This is simply a way of calculating the value of the company’s assets against its share price. <\/p>\n

For example, Lynas Corporation [ASX: LYC]<\/strong> is a rare earths miner. Today it’s trading at 93 cents. But back in April it was selling for $2.60 a share – the stock price has dropped 61%! What happened?
\nThe volatility in the market hasn’t helped. But JP Morgan’s downgrade of fellow rare earths miner Molycorp [NYSE: MCP]<\/strong> was the real catalyst for the price fall. It started a big ball of negative sentiment rolling. Bankers, traders and retail investors began bailing out of rare earths stocks. They short sold the sector. All on the back of negative sentiment – the fundamentals for the rare earths market hadn’t changed. China still controls more than 95% of the rare earths market. Making matters worse, China is expected to offer a paltry 30% of its 93,800 tonnes of rare earths to the export market. And rare earth demand is tipped to reach 185,000 tonnes in four years. <\/p>\n

But the power of this negative sentiment sparked by JP Morgan’s re-rating of Molycorp pushed the share price of Lynas deeper into the red. Even though the average price for Lynas’s assets – its rare earths – was up 31% in the third quarter!<\/p>\n

Here’s the thing. Using the price-to-book value, you can see through the market sentiment and get a clearer picture of the company’s asset value.
\nLynas has a P\/B value of 2.98. <\/p>\n

Now, for the value investor, a company with a P\/B of less than one tells you one of two things. Firstly, it could be that the market feels the asset value is inflated. Or secondly, the company has a lousy return on its assets. <\/p>\n

The higher a company’s profitability, the higher the P\/B value will be. And at 2.98 Lynas is sitting pretty. <\/p>\n

This is why I focus on profitable companies.<\/p>\n

Over time, it’s a much lower risk way of building wealth than trying to chase the market up or bail out on the way down.<\/p>\n

A company’s true value has nothing to do with sentiment. If you understand this and have the right temperament, you’re well on the way to becoming a very successful investor.<\/p>\n

Greg Canavan
\nMoney Morning Australia<\/em><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nWhat\u2019s The Biggest Mistake Most Investors Make? <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au You might be one of those investors who have been wondering whether now is a good time to look for cheap stocks. At a time like this – with the stock market breaking below 3840 this morning – it’s important to understand the difference between the intrinsic value and the price of a … <\/p>\n

Continue reading “What\u2019s The Biggest Mistake Most Investors Make?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-24244","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24244","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=24244"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24244\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=24244"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=24244"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=24244"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}