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
- It is estimated that Silver Standard owns about 1.3
Billion ounces of silver in the ground.
- In 2012 an investor could buy a 560% larger ownership of
that 1.3 billion ounces of silver than they could in 2007.
- 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.
