Friday, February 20, 2009

The price is right!

Ready to try?
Citibank was trading at above $50 not too long ago. Goldman Saks hit a high of $235. GE was hovering above $35. After a 50% or more price reduction - the price became even more attractive - Citi at $10, GS at $120 and GE at $15. Wow - a 50-80% discount on quality blue chips (2 of which are endorsed by none other than the oracle of Omaha) - the price had to be right.

Guess what - Citi closed yesterday at $2 and change, GE is at $10 and GS is flirting with $80. So is this a good price?

If you don't know - conclusively - then pause and ponder.

The fundamental rule of buying is - matching value with price. You use this rule everyday. Most spending like food, clothes, products, services are predicated by value and price. Even how much you get paid is determined by this rule. So shouldn't you know what is the value of the business in which you are investing?

Bottomline - do your homework and figure out the value of the business, outsource this task to an expert or stay away from this investing game (at least picking individual stocks). The price on the tape is a reflection of market psychology today - it is not an assessment of business value.

If you got burned chasing cheap prices recently - remember it's all relative. What is cheap today can be marked down another 50% tomorrow. Ouch!

"Only Goldman (GS - commentary - Cramer's Take) got it right. That means you should forget about the other guys, even sell the other guys into strength and just buy Goldman Sachs up here. I don't care that it is up $13 and change; it isn't done. I believe Goldman can earn $30 and deserves a 10 multiple."
Cramer 11/07 - GS closed at $220

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