This coming Saturday at the Financial Advisors Congress, I will be speaking on “How to Spot the Next Stock Market Crash”. That is a relatively easy thing to do if you know what to look for and how to see it. There are clear signs and factors that set up for the market making a substantial move lower both abruptly and over time.
One problem is that investors and many experts compare stock-market crashes with asset-price “bubbles” bursting and that is not the case. Further, they also do not understand the difference between an asset price being “costly”—something with a high price tag—and being “expensive”.
Let me share a silly story. I use a widely available toothpaste that sells at a price of P380 and it is not expensive, merely costly. “Colgate” or other brands sell for about P100 for the same amount. People who know me—and my wife—would tell you that we are extremely tightfisted when it comes to spending. But we buy what might be considered to be the highest-priced ordinary toothpaste available because it is not expensive. Expensive means that the cost of the product or service is greater than the value. Costly only means that it carries a high price.
In terms of value—performance, quality and results—my toothpaste is actually “cheaper” than any other brand because the value is very high in relation to the price.
People concerned about asset-price bubbles will tell you with complete expert confidence that the bubble will burst when the price is too high. They will give you an expert reason or formula why they know that the asset price is expensive. And when the price continues to go higher, they say the bubble is getting larger and closer to bursting. They are wrong. Asset price bubbles have nothing to do with the price, and everything to do with understanding the concept of expensive.
At the beginning of the Tulip Mania in the Netherlands in December 1631, the same amount of money that you could pay for a new house would buy you 6,000 tulip bulbs. At the price peak in February 1637, one house would buy you one tulip bulb.
When the price doubled to one house equaling 3,000 bulbs, the experts were probably warning how there was a price bubble ready to explode. The warnings grew louder at 1 to a 1,000 and louder at 1 to 500 and so on. “Prices are too high!” the experts screamed. But the person who sold his house, bought 10 tulip bulbs and held on to the top, made a 1,000-percent profit. Even the guy that bought two tulip bulbs after selling his house for cash doubled his money selling at the price peak.
But what the modern-day “bubble experts” forget to mention is that even after the so-called bubble broke, the price of one of the rarest tulips—the Viceroy—continued to appreciate to a price of one to five houses.
The actual price has almost nothing to do with stock-market crashes and has everything to do with another factor, which I will explain and show on Saturday.
In 2014 for the same amount of money you could buy one share of Ayala Corp. at P708, or 3.73 kilos of pork at P190 per kilo. Today you can buy one share of Ayala Corp. at about P940, or about 5 kilos of pork. The price of a share of Ayala has appreciated to about 35 percent higher than the price of pork three years ago. Are Ayala shares expensive in relation to the price of pork or are they only more costly than before?
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.