Posts tagged " intrinsic value "

Intrinsic Value; What Makes A Deal Worth Buying?

September 26th, 2009 Posted by Stocks No Comment yet

Investing Principles and Methods Series, September 25, 2009

My wife and I considered ourselves to be savvy bargain hunters.  We both needed to purchase a watch in anticipation of our job interviews.  Due to the economic meltdown there aren’t many jobs for someone like me.  I didn’t take the usual track in the investment field.  I didn’t go to an ivory league school.  When I first came to New York it was something many recruiters told me – that lack of an ivory league education meant it was very difficult for me to find work on Wall Street.  I was young, so when people say things that are impossible I have a knack for thinking to myself, ‘let me try it’ anyway.  To think about it, back then I was fearless, now, perhaps much less.

I believe my wife is one of the smartest people I know.  She came from some of the top schools in Singapore.  In Singapore the standards are so high, if I was a child growing up in Singapore it would be difficult to imagine what it would be like for me.  Thank goodness I was fortunate to grow up in Utah.  What a wonderful place where I had many fond memories of my childhood.  Needless to say both of us are out of work hence I have time to work on this project.  I plan to continue with this project until I’m completely satisfied that my readers know enough in this area for it to be his or her second nature.  At the moment, I don’t know if anyone is reading this.  I will persevere as if I have at least one reader.

Investing is fascinating and it is something I feel anyone can do a satisfactory job as long as you have an interest.  Today’s topic: yes, let’s get back to the topic.  If you have ever visited New York City you might have been to ‘Ground Zero’ and just across the street on the east side is Century 21, they sell brand name merchandise for a fraction of the Manufacture Suggested Retail Price (MSRP).  My wife and I found a beautiful watch made by Bulova.  It isn’t the best or the most expensive brand but it was definitely not cheap.  Bulova make a very high quality product.  But for some reason it was available for 69 percent less.  We saw a watch on display for $129 with a MSRP tag of $425.  We purchased it but then realized it had a scratch.

Well, that was enough for us to declare a state of emergency – so the hunt for a different watch was on; one without a scratch.  What we saw were amazing while we shop.  The watch industry was in some kind of liquidation mode.  Merchants were selling brand name watches like Concord, Citizen, and Bulovo at substantial discounts.  I always had a liking to Concord but they were usually priced around $2,000, now one of the models was going for $495.  Still, Citizen Titanium Eco watches; the indestructible watch with everything you ever need in a watch was on sale for $169, usually retailed with MSP of around $650.

Nevertheless both were much more then I can spend.  My wife thought about buying it.  We begin our discussion, as you would, I’m sure.  Our discussion led to a level of comfort with spending to a point where we were thinking about Rolex and the likes.  At that point we realized that we could only afford something nice but affordable.  Our conclusion, of all the brands, we thought Bulovo was the best for the money we can spend.  We ultimately found a watch retailed or with MSRP for $795 for only $129 and another retailed or with MSRP for $625 for $88.  We are both happy with our purchases.  I love my watch, BTW.

Investing in stocks is nothing more complicated then the process we went through to make a purchase of things we like.  In my example above, the MSRP tag is similar to what most investing people called the intrinsic value.  I got my watch for $129 that is similar to the quoted price.  It is easy to find out what the quoted price for any given stock listed on the exchanges, you can access or MSN Money.  However, the intrinsic value or price or the MSRP tag is much harder to find out.  Most of what we do in investing is to shop for quality brands at a discount.  We go thought the same process as the one I illustrated above.  We do not pay MSRP for anything.  We want to aspire to be the Century 21 for stocks.

Here’s where it becomes a challenge – our question, “What is the MSRP tag?”  If you don’t know what the MSRP tag is how will you know if you are not over paying?  In investing, you make money when you buy.  So we need to buy it cheap.

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