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Common Sense, Bogus Metrics Plus Baloney Justifications, Is Silver cheap relative to Gold? 

Stock-Markets / Trader Psychology Apr 13, 2010 - 01:45 AM GMT

By: Graham_Summers


Best Financial Markets Analysis ArticleAlmost every other day I receive an email from a concerned investor asking me if some asset is cheap relative to another asset or if some metric justifies that some perceived outcome is about to unfold.

Among the various question

  1. Is Silver cheap relative to Gold? 
  2. Is Gold cheap relative to Oil?
  3. Do interest rates forecast that the recession is over?
  4. Is some sector cheap based on its historical P/B, or P/ to anything for that matter?
  5. What does the yield curve suggest about deflation/ inflation?

… and countless others.

Let me be blunt here. Most, if not ALL of this stuff is flat out bogus in terms of predicting anything. It is nothing more than a nonsensical attempt to quantify a extremely  complicated situation (the financial world) into easy to digest “sound bites” to justify an investment thesis. If investing were so simple that you could apply an “if A then B” thesis to making money, then everyone would beat the market and the various pundits and investment gurus would vanish into obscurity.

The fact of the matter is that common sense trumps just about ANY clever metric you can come up with. Most individual investors would likely make WAY more money and avoid greater losses if they simply asked themselves “does this make sense?” rather than using all the clever metrics the financial pundits spout all the time.

Let’s consider homebuilders, for example.

For the last year or so, I’ve seen countless essays and analyses arguing that homebuilders are cheap based on some metric. I’ve even seen some articles claiming that property in Detroit or some other distressed market offers value because you can buy a house for $700 there.

OK, let’s forget all the Price to Book, cash flow, property values, and simply take a common sense look at a house as an asset.

First off, what’s a home’s value? If you answered “depends if anyone wants it or can afford it,” you’re WAY ahead of most of the crowd. Forget how fancy the marble countertops are and how many Jacuzzi tubs it has, a home is worth ZERO unless someone WANTS it and CAN AFFORD it. Unless you’re looking for a place to squat, without a buyer a house is just a box of wood covered with paint and containing various circuitry and plumbing: all items that depreciate without upkeep by the way.

So in order for housing to be cheap, we need buyers with access to large loans (homes are high priced assets that almost no one can buy in cash). With most people broke or unable to afford homes, a massive inventory of homes already sitting on the market, and homebuilders STILL producing more homes… does this mean homebuilding stocks are cheap?

NOPE. It means that an expensive, unaffordable depreciating asset class which just suffered the biggest bubble in 80+ years is suffering from an excess of inventory, has more inventory coming online every year, and is suffering from a lack of buyers.

When you look at homebuilders from this perspective, you quickly realize that any talk of “value” or clever financial metrics are irrelevant. Common sense dictates that buying a homebuilder doesn’t make sense. Why talk yourself OUT of doing something sensible to do something that requires CLEVER justifications?

I could apply this same kind of analysis to virtually any of the most popular investment thesis/ monetary policy out there today and come up with similar common sense answers that refute just about every clever justification.

Can you solve a debt problem by issuing more debt? Nope.

Does printing money make people rich? Nope.

Do stocks have value at today’s levels? Not if their financial results are collapsing, their costs are rising, and they’re not paying you to own them.

Is housing ready to bounce back?  Not if people can’t afford to buy houses.

Is the economy recovering? Not if people/ the consumer is broke.

Is some fund a good investment? Not if it doesn’t beat the market (why pay the fees otherwise?)

Is this investment cheap relative to that investment? Hard to tell, we’re dealing with bubbles and funny money: a paradigm in which the whole world operates based on the insane beliefs of people who never actually ran a business.

If you want to stop losing money and starting sleeping better at night, do yourself a BIG favor. Simply look at EVERY investment from a simplistic, common sense point of view. If it doesn’t make sense on a basic level, DON’T do it.

In fact, if you NEED a formula for investing going forward, use this one:

COMMON SENSE > Bogus Metrics + Baloney Justifications

Good Investing!

Graham Summers

PS. I’ve put together a FREE Special Report detailing THREE investments that will explode when stocks start to collapse again. I call it Financial Crisis “Round Two” Survival Kit. These investments will not only help to protect your portfolio from the coming carnage, they’ll can also show you enormous profits.

Swing by to pick up a FREE copy today!

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2010 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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