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If this does not get
your attention I do not know what will. Imagine buying a $400,000 furnished
condo in 2011 with the proceeds of a $6,250 investment that was made in 2003.
We know someone who has actually done this by using the power of relative
value. Let us explain the concept and then we will explain how the relative
value may apply to other great opportunities in our markets today.
Example 1:
Year 2003
$5.00/ounce of
silver. BUY 1,250 Ounces = $6,250
$400,000 Condo in
Las Vegas. (Popular,
rising market). AVOID Market
Year 2011
$44.00/ounce of
silver (Average Sale Price). SELL 1,250 Ounces = $55,000
$55,000
Same Las Vegas Condo. BUY CONDO
WITH PROCEEDS
Basically, that $6,250 worth of silver grew in value
and at the same time the condo fell in price, essentially allowing the
$400,000 condo to be purchased with only $6,250 of initial capital. The
relative value of silver increasing to $55,000 and the condo falling in price
to $55,000 created an amazing opportunity to switch capital from one asset to
another. These numbers were generalized and we did not account for
transaction costs, but the general concept of relative value is what is
important to understand here. Imagine owning a $400,000 condo
“outright”, with no mortgage, and only having paid a total of
$6,250 for it eight years earlier.
Do we see some relative value opportunities today? YOU BET!
Year 2007
$46/share of Silver Standard (Silver Mining Equity). AVOID
$16/ounce of silver BUY SILVER.
$16 / $46 = 1 ounce of
silver will buy 0.35 shares of Silver Standard
Year 2012
$13/share of Silver Standard. BUY SILVER
STANDARD WITH PROCEEDS FROM SILVER
$30/ounce of silver. SELL
initial investment in silver
$30 / $13 = 1 ounce of
silver will buy 2.3 shares of Silver Standard
Ø It
is estimated that Silver Standard owns about 1.3 Billion ounces of silver in
the ground.
Ø In
2012 an investor could buy a 560% larger ownership
of that 1.3 billion ounces of silver than they could in 2007.
Ø In
2012 that 1.3 billion ounces of silver is worth nearly double the value it
was in 2007. At the same time Silver Standard has fallen about 72% in price.
The following chart illustrates this concept in the
form of a ratio.
When the blue line rises in the above chart the price
of the Silver Stock is increasing in value faster than the Silver is and vise versa on the down side. This chart illustrates how a
mining equity with 1.3 billion ounces of silver in the ground has been decreasing
in price at a time when the product they sell was increasing. The relative
value has switched significantly, but this dynamic can not
last forever.
Let’s look at another great relative value
opportunity:
The above chart illustrates how many Silver Standard
Shares an investor can buy with one Apple Inc. share. As the blue line heads
up an investor in Apple Inc. could cash in some or all of their profits and
buy a much larger portion of Silver Standard’s estimated 1.3 billion
ounces of silver that is in the ground. It is completely possible that a
company such as Silver Standard has internal or external issues that are
causing the stock price to fall. The relative value concept can be applied to
entire markets or to a basket of stocks in order to help reduce risk.
In our opinion this is a fantastic way to view the
markets and can lead to real opportunities such as the silver versus condo
example listed at the start of this article. Looking at a chart from a
relative value perspective can help eliminate the distracting effects of a
fluctuating currency and help provide better historical insight for market
timing purposes. At www.investmentscore.com we have built
proprietary indicators that incorporate relative value principles to help us
monitor major market moves. We are currently investing in the silver market
and if you would like to learn more about our service or to sign up for our
free newsletter we suggest you visit us at www.investmentscore.com.
Michael Kilbach
Editor
Investmentscore.com
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