Better Quality for the Same Price
Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.
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Let's say there are 2 companies: A and B.
A is a better quality company than B because it has stronger earnings.
To simplify, let's say A is trading at $25 while B is trading at $20.
Now, if you have $20, you could only buy B.
Soon, a market correction soon hits, and A is now trading at $20 and B at $15.
With your same $20 now, you could buy a better quality asset — A, instead of B.
This illustrates a simple point.
Price is what you pay. Value is what you get.
Your $20 remains unchanged but the value you can get from it does.
For the same price of $20, you get better value now by buying A.
While A's fundamentals have not changed, its price has, and as such, you're now able to purchase a better quality asset for the same price.
That's the opportunity that market downturns provide — when almost all assets are trading at a discount, both the good and the bad.
If you focus on accumulating good quality assets at discounted prices, you can get better a bang for your buck. In other words, greater value for your money.
This applies not just to investing but to anything in life.
Take for example my trips to the fruit store. In my previous article on fruit shopping, I mentioned they sold blemished fruits for $1 per basket.
Over the months, I noticed something.
The fruits — the type, quantity and quality, change over time.
During seasons where there is an oversupply of one fruit, both the quality and quantity of the blemished fruits going for a dollar a basket increases.
When the store has an oversupply, inevitably there will be more leftover fruits.
And because they can't sell all, more ends up in the discount baskets.
For example, early this year, there was an oversupply of dragonfruits with heaps of it everywhere.
And unsurprisingly, the discount pile was filled primarily with them. 6 dragonfruits for a dollar. While blemished, it tasted just as good. The fruits were huge and juicy.
After the dragonfruit season was over, the discount pile only had 3 dragon fruits each. All were smaller and less fresh.
And today with the season over, there aren't any dragonfruits in the discount pile. While the store still sells them for $1.20 each, it's clear they weren't in a rush to clear them as there wasn't any in the discount pile.
The same applies for mangoes. Early this year there weren't many mangoes in the discount pile. Even if there was, it was a few small ones that didn't look fresh. Now in the mango season, there are plenty of mangoes in the discount pile. Similarly, they were going for 6 for a dollar. They were fresh and sweet.
Investing is much like buying fruits.
You don't know what the market will offer you each day. But you got to be ready when the market offers you a great deal.
And great deals often come when there is an oversupply.
In investing (and anything else), an oversupply happens when there are few buyers and many sellers. This happens when the market capitulates or is feeling pessimistic. Such times are the best times to accumulate quality assets at a discount.
Your same $1 can get you better bang for your buck. Instead of 3 small dragonfruits, you get 6 big quality ones.
Likewise, with the same $1 you can accumulate better quality assets in times of financial distress.
And if you're fortunate, you could even accumulate both higher quality and quantity for the same $1.
Such are the best times to invest — when the margin of safety is the largest and when even the freshest of fruits are going for a big discount.
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Disclaimer:
The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.
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