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Today, I will attempt to talk about market price. To discuss this market price concept, let's take this scenario.
There is a condominium for sale at Damansara Foresta for RM700,000 as an investment property.
Damansara Foresta (Homes within Nature)
(This is an ongoing project of L&G Bhd, a company that I invests in. Beautiful isn't?
If you do wish to buy a condominium (luxury), do check this one out, it has won the best landscape architecture in Asia Pacific Award. )
Say, Every year, you are able to generate 6% return from this property without leverage, which amounts to RM42,000. (RM3,500 per month).
Since it is built in a prime location, you reckon that with the increase in demand and inflation, the rental yield in relation to the price you paid should increase . After contemplating, this is a good deal (in addition, you get enjoy the benefit of leverage) and you decide to buy the property. You paid RM700,000 for it and that price you paid is your "initial investment".
Across the next few years, your calculation turned out well, demand is strong, you're able to generate the 6% return that you want.
That's case 1. Now, let's make this story a little more interesting. We will add a moody neighbor into the story.
Let's call this neighbor, Mr.Market.
Every day, Mr.Market will shout at you a price which he will buy or sell your property.
On the first year, when there are not much stimulus, being prudent, he will shout a fair price at you, RM700,000 plus minus RM20,000 to buy your property or sell you his. That price that he shouts at you is the "Market Price". Knowing the gain is so little, you decide that it is not worth the trouble of getting a new property. You just let him be.
One year has passed, you have gained your RM42,000 from rental.
That RM42,000 is the "return on investment".
The next year is a roller coaster ride. You've got news of Economy Slowdown, Tension in Ukraine, Possibilities Fed Interest Rates Hike, Oil Price Slumps and etc. These uncertainties make him feel insecure. He shouts a very low price at you, maybe RM420,000 to buy your property or sell you his. At this moment, you have 3 choices, buy, sell or hold. You calculated that if the rental yield is still RM42,000 a year, you could get a 10% ROI from this deal. If you have more cash, you can buy the property but if you don't, you can just ignore him again.
Assuming that you ignored him, you would have collected a total of RM84,000 from the cumulative rental yield of the two years.
That's a 12% return on your initial capital.
On the third year, economic data seems good, low unemployment rate and fed announces that they will not raise the interest rates until years later. He suddenly feel bullish and doesn't want to miss out on the action. He offers to buy your property at a very high price or offer you his at RM 2,000,000 . Again, You can decide to sell to him, buy from him or you can still keep the property. After calculating and considering, you decide that this is an "offer you can't refuse".
You sold the property to him and made a gain of RM1,300,000 + RM126,000 in rental yield.
That's a total of 204% return on your initial investment in 3 years! Very good!
The above illustrates how an investor usually profits from a trade by understanding what is Market Price. Do you agree with me?
This story can be related to the stock market by changing the terms.
In the above story
Mr.Market = Other Investors as a whole
The Price he shouts = Market Price
The daily shouting of price = Stock Market
Condominium = Stocks
Rental = Dividend
After reading the story above, let me ask you one question, what is market price in reality?
Market price is simply a reflection of human perception.
When human perceives the economy or the business is good or going to be good, demand rises, pushing prices up.
When human perceives the economy or the business is bad or going to be bad, demand drops, pushing prices down.
How fast can human perception change?
As you can see from the 5 days KLSE chart above..
In an instance.
The real aim that I want to achieve with this article is this.
To break the misconception that
"When the price of your investment drops, you lose money. - Amateur"
One of the ways that I think investors can profit is by trying to position yourself to get lucky. Try to find investments that are like bank deposits that comes with a lottery ticket. Low Risk with a chance of Very High Return.
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