Monday, August 3, 2015
It's one of the great secrets of the financial markets... something that lets you see what others do not.
Some might even call it an unfair advantage.
If you get nothing else from reading our research, please get this idea... and use it for your personal benefit.
Please "get" the valuable concept that underlies the saying, "There are always two sides to a price."
Once you learn this idea and start using it, you'll ascend to a higher-level understanding of the financial markets... even a higher understanding of everyday life.
Those are bold statements. Below, we follow through on them...
Nearly every day of your life, you'll encounter prices. You've got prices for financial assets... cars... houses... products... services... and the list goes on. You can't make a move in our modern society without seeing a price for something.
Most people view a price as having just one side. A stock price is $44... a house is $250,000... a car is $20,000. But rather than seeing a price as having just one side, the sophisticated individual sees a price as having two sides. Here's how it works...
On one side of a price, you have the product, service, or asset being measured. On the other side, you have your "measuring unit." This is the currency or asset you're measuring the other side with... like dollars, euros, Swiss francs, gold, or Japanese yen.
There are all kinds of ways this works. You can measure the price of crude oil in terms of other energy assets, like natural gas. You can measure a home's price in terms of gold. You can measure Chinese stocks in Mexican pesos. You can measure Russian crude oil in Canadian dollars. You can measure the price of stocks with other assets, like crude oil or silver.
You may not have known that stocks are at a nine-year high relative to silver. They're up 449% in four years.
Keeping "two sides to a price" in mind lets you see things others do not. It will allow you to spot pockets of extreme value that others will never see. It can open up a new world of investment opportunities to you.
And once you understand this idea, you're liable to answer questions like, "Did gold rise today?" with, "Rise relative to what?"
When you realize there are always two sides to a price, you're very likely to see stock or commodity bear markets in a different, more useful way.
A stock market decline isn't just a bear market in stocks... it's also a bull market in cash. It's an increase in the amount of ownership stakes you can acquire in productive assets.
For example, let's take a hypothetical company, Benson Breweries. With its suite of popular, brand-name beers, it's one of the leading beer makers in the country. It has a large and loyal customer base.
Because of these attributes, Benson Breweries is a great business that rewards its shareholders. It has increased its dividend payment every year for the past 13 years. The current dividend rate is $1 per share. Since Benson's share price is $50, the dividend yield is 2%.
Now... let's say stocks enter a bear market. During this bear market, Benson's business holds up. It continues to sell beer. It continues to pay its dividend. But since stocks are out of favor with investors, Benson's share price falls to $30 per share.
In this example, we can say that Benson's stock declined in value by 40%.
But... we can also go a step further and say the amount of this great business we can buy for one dollar has increased by 40%. The bear market in Benson stock was also a bull market in your cash. Said another way, as stock prices go down, the amount of valuable assets your cash can buy goes up.
We can also see this idea at work in the real estate market.
Let's say there's a well-built single-family home in your town. It's capable of generating $10,000 a year in rental income (before factoring in expenses like maintenance and insurance). Let's say it would sell on the current market for $120,000, or 12 times the annual rent.
Now... let's say that housing in your area enters a bear market. That home declines in value and sells for $90,000.
We could say the home's price declined in value by 25%. Or, we could say that your dollars increased in value relative to the home.
You can now buy the home that throws off $10,000 in rental-income stream for $90,000 instead of $120,000. It was a bear market in housing, but also a bull market in your ability to acquire valuable assets with your cash.
Let's go to the commodity market for an example. We'll use gold. Gold was used as money throughout history... And folks could turn to gold in a currency crisis. We think everyone should own some as financial-disaster insurance.
In 2011, gold traded as high as $1,900 an ounce. Over the last four years, it has plunged in value and now trades around $1,090. That's a 43% decline in the price of gold.
By now, you know the other way to view this situation. Your ability to acquire this valuable natural resource has massively increased. You can now buy a lot more financial-disaster insurance with your investment dollar.
The greatest use of this high-level knowledge is how you view a bear market or a financial crisis. Most investors see them as reasons to run away in fear.
But when you know that a bear market in stocks, commodities, or housing is also a bull market in cash, you're more comfortable keeping your account in cash, knowing the whole time that it's increasing in value... and will eventually allow you to buy valuable assets at fire-sale prices.
"There are always two sides to a price." Think about that the next time you see a market crash. See what others don't... and get ready to buy with that stuff in your wallet, which just enjoyed a bull market in buying power.
"The financial media are full of headlines stoking fears about the economy," Brian and Ben Morris write. "But despite what the pessimists would have you believe, the American consumer is alive and well." Learn the most important financial news you're not hearing right here.
"Lots of investors have an important question on their minds right now," Brian and Ben write. "'Should I be worried about a crash?'" They say the answer is YES... if that's what it takes for you to put a catastrophe-prevention plan in place. Get all the details here.
The bull market in biotech continues... Amgen and Celgene rise 45%-plus over the last year.
Timber company Rayonier falls more than 15% since February.
Cruise companies Royal Caribbean and Carnival rise 35%-plus in the past nine months.
Oil giant Chevron sinks to a new 52-week low... shares fall nearly 35% since July 2014.