To Play the Market, You Must First Understand It
- The purpose of the market is to facilitate liquidity: The market does not provide valuation analysis. It tells you price. It does not tell you value.
- Price does not equal value: All stocks are mispriced, some by a little, some by a lot. The value-centric investor, naturally, seeks to buy stocks where value exceeds price by a wide margin.
-- As covered in "Understanding the Stock Market: Tecumseh, Office Depot."Plus, To Play the Game, Understand This: Price Change Exceeds Value Change If the market is going to provide cash offers each and every day, then you can't expect prices to be stable. Prices will fluctuate in a wide range. It should come as no surprise that prices oscillate by more 50% per year for the average stock, while value changes by less than 1% per month. Sophisticated investors seek to arbitrage the spread between the change in price and the change in value. Here is an example of such an opportunity: Whirlpool (WHR - Get Report). While the business value has changed by slightly less than 1% per month, the stock price has ranged from $67 to $118 over the last year. Lately it traded at $72. And it's worth at least $150 a share.