Why Invest in Something Nobody Wants?
Imagine you're shipwrecked on a deserted Caribbean island, not very big, a couple of beaches and a few palm trees. Initially you feel glad to be alive, but having wandered around, you discover you're completely alone. Then as you stroll along an empty beach you stub your toe on something hard sticking out of the sand. It glints in the early evening sun. You reach down and with difficulty pull it out the sand. To your amazement it's a gold ingot! Yep a whole one. I appreciate the price of gold has been falling over the last wee while, but it's still worth $1200 an ounce. And you have a whole bar of it in your hands.
Question is … as you stand there on this deserted Island … how much does it cost? No it's not a trick question. Yep you're right … the answer is … NOTHING.
How come? Because there's nobody else around … just you. So its costs nothing. To me this is the easiest way of understanding supply and demand. If there's not enough supply and therefore too much demand, the price of anything will rise. And if there's over-supply and too little demand, prices will fall. It happens in life all the time … house prices, oil, coffee, furniture etc. Simples.
What's your position in the herd?
To get the price of your gold bar to rise you need competition … other people! Let's call them "THE HERD". To buy something at a lower or higher price depends on where you happen to be compared to THE HERD.
Think about it. There are only 3 places you can be. In front, in the middle of the herd, or at the back. Only 3 places. So where do you have to be, compared to the masses, to get something cheap? To get a bargain you have to get there before the herd spots the opportunity. So you need to be in front of them.
How do you think it feels to be over here, on your own, buying this cheap whatever, while everybody else is over there laughing? It's very uncomfortable. Especially when the media wheel out expert after expert in consensus arguing that what you've just snapped up cheap is anything but a bargain.
Do you want to fight through the crowd?
Value investing is what I've described above. The best exponents over the years, including Warren Buffett and Neil Woodford are disciplined to seek quality shares that are much cheaper than they should be, and they tuck them away until the herd realises that too. But then there's a herd pushing prices higher when demand exceeds supply. Buffett said he prefers not to have to fight his way through the crowd to buy shares. And neither should you.
So when the consensus agrees prices of shares are too cheap you'll know what to do. Won't you? Alternatively come and talk to us.
You should always be aware that:
- The value of investments and any income from them may go down as well as up. You may not get back all of your original investment;
- Past performance should not be seen as an indication of future performance;
- Indications of past performance displayed on this website will not necessarily be repeated in the future; and
- Rates of exchange may cause the value of underlying investments to go up or down.