There are Always Two Sides to a Price

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Prices.

You can’t make a move in today’s world without seeing the price for something.

You’ve got prices for cars, homes, gas, food, insurance, medical care, appliances, and services. You’ve got prices for financial assets like stocks and bonds.

Most people view a price as having just one side. A stock’s price is $42, a home’s price is $350,000, a car’s price is $27,000. For most people, the thinking stops there.

Yet, there’s a very different, very powerful way to view prices beyond them having just one side. Not many people use this way of seeing things, but it’s one of the great secrets of the financial markets. It’s something that lets you to see what others do not.

Once you learn and start using this idea, you’ll ascend to a higher level of understanding the markets even a higher understanding of everyday life.

Those are bold statements. Below, I follow through on them.

Rather than seeing a price as having just one side, an enlightened individual sees a price as having two sides. He understands there is great power in knowing that “there are always two sides to a price.”

Here’s how “two sides to a price” works:

On one side of a price, you have the asset, product, or service being measured.

On the other side, you have your “measuring unit.”

This is the currency you’re measuring the other side with, like dollars, euros, Swiss francs, Bitcoin, Japanese yen, or “hard money,” gold.

If you keep these two sides in mind, a whole new world of opportunities will open up to you. When you realize there are always two sides to a price, you’ll start viewing the stock, bond, and commodity markets in a much more useful way.

Both sides of a price can fluctuate wildly. They can boom and bust. They can enter long-term bull markets and long-term bear markets.

Most people panic during stock crashes and bear markets, but someone who knows there are always two sides to a price thinks and acts differently.

This is because he knows a bear market in stocks is also a bull market in cash.

He knows that when asset prices go down, his power to accumulate assets goes up.

For example, let’s take a hypothetical company, Broward Breweries. With its suite of popular beers, Broward is one of the country’s top beer makers. It has a large and loyal customer base.

Because of these qualities, Broward Breweries is a great business that rewards its shareholders. It has increased its dividend payment every year for the past 18 years. The current annual dividend payment is $2 per share. Since Broward’s share price is currently $50, the dividend yield is 4%.

Now, let’s say stocks enter a terrible bear market. During this bear market, Broward continues to sell beer. Its customers remain loyal and the fundamentals of the business itself remain strong. Given this, Broward continues to pay its dividend, but since stocks are out of favor with investors, Broward’s share price falls to $25 per share.

In this example, one can say Broward’s share priced dropped by 50%. For most folks, the thinking stops there.

Since we are enlightened investors, we go a step further. We say the amount of this great business we can acquire with our investment dollar has increased, not by 50%, but instead, by 100%!

To illustrate, let’s say we wanted to spend $5,000 on Broward’s stock. At a share price of $50, that would have bought us 100 shares, but then Broward’s stock fell 50% to $25. Our same $5,000 now buys us 200 shares, 100% more than before, even though the stock itself only fell 50%!

Thanks to Broward’s lower stock price, we can own a larger share of the business’s assets – per dollar invested – than we could before.

We can also claim a larger share of Broward’s dividend stream per dollar invested. The falling share price translates into us getting a much larger cash yield on our investment. Buying Broward at $25 per share instead of $50 per share means we earn an 8% yield on our investment instead of a 4% yield.

This simple example shows how the mirror image of a bear market in stocks is a bull market in the value of your cash.

Said another way, as asset prices go down, your ability to employ cash in the acquisition of assets goes up.

You can also see this idea at work in the real estate market.

Say there’s a well-built single-family home in your neighborhood. It’s capable of generating $12,000 in annual rental income (before factoring in expenses like maintenance and insurance). Imagine it would sell on the current market for $120,000, or 10 times rent.

Now, let’s say that housing in your area enters a bear market. That home declines in value and sells for $90,000.

In this instance, we could say the home’s value decreased by 25%. Or, we could say your dollars increased in value relative to the home. You can now buy the home that throws off $12,000 in rental income for $90,000 instead of $120,000. It was a bear market in housing, but also a bull market in your ability to acquire real estate with your cash.

Let’s go to the commodity market for another example. We’ll use copper, one of Earth’s most useful natural resources. Copper is used in cars, homes, appliances, electronics, power lines, construction, and a thousand other things.

In 2007, copper traded for around $3.50 per pound. During the 2008 financial crisis, it plunged in 57% in value.  By early 2009, it traded for around $1.50 per pound.

By now, you know the other way to view this situation.

Copper’s massive price decline increased the amount of this useful natural resource you could accumulate with your investment dollars. In 2009, your investment dollar bought you a lot more copper than it did in 2007. (And by 2011, the dollar price of copper had recovered more than 150%.)

We’ll go to the currency market for one last example.

The financial media often runs articles about big moves in the currency market. You might read how the Canadian dollar has dropped 10% in the past year, or how Russia’s currency, the ruble, is crashing.

But when a currency crashes in price, another currency, like the dollar, soars in price relative to that currency.

That’s exactly what happened in 2014 when Russia’s economy struggled badly. The Russian ruble lost more than 50% of its value relative to the U.S. dollar, but you know there are two sides to this story.

On one side of the price, you had a currency crash. On the other side, you had a currency rally. During this rally, the dollar holder’s ability to buy Russian assets skyrocketed. (By the way, this knowledge is useful for taking vacations. Your buying power goes a lot further in a country that has experienced a big currency decline.)

“There are always two sides to a price.”

When you know a bear market in stocks or commodities or real estate is also a bull market in cash, you’ll be more comfortable keeping a large portion of your wealth in cash, knowing the whole time that it’s increasing in value and will eventually allow you to accumulate valuable assets at bargain prices.

Keep this in mind the next time a market crashes. You’ll see what others don’t. You’ll start considering your cash as “returns in waiting.”

You’ll know your cash is enjoying a bull market in purchasing power, and you’ll be ready to buy valuable assets at fire sale prices.

Next, we will examine the “butterfly effect” of spent money and how it hurts your financial freedom.

Regards,

Brian

 

 

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/02/there-are-always-two-sides-to-a-price/.

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