If someone offered you $10 for your car, you would
most likely be insulted at such a ridiculously low price. The obvious reason is
that the value of the car is many thousands of dollars greater than the offer.
Let’s assume, however, that it was the only price being bid for your car. In
today’s world of instant financial journalism and the Internet, word would
spread that the price of cars had plummeted to $10.
Holders of loans against cars that had been financed
would panic..
“Pressure would be brought to bear by their financial
backers and shareholders to raise new capital to reinforce their now
dramatically impaired balance sheet as all of the cars held as collateral has
now precipitously dropped in value.
While this is a fanciful story, it highlights the
difference between price and value. Most investors base their decisions on
price. Successful investors base their decisions on value. In the above
scenario, the John Templetons of the world would have scooped up all of the
cars, contracts and shares of the companies involved in that sector of the
economy. With time on their side, great fortunes would be made as others
panicked.
The situation is analogous to what has happened in
the precious metals and gold/silver mining companies. An artificially low price
induced price-based investors to dump their metals and shares literally throwing
fortunes out the window..."
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