Monthly Letter April 2012

The right price – an important concept that a lot of people rarely think about. For most of us the right price is synonymous with the lowest price. Low is good, lower is better and lowest is, yep, the best. Small things we buy on an everyday basis are not given the same attention when it comes to price as the durables that we buy a little less often. The price of a flat-screen television is more important to us than the price of one litre of milk. At least we put more effort into finding the lowest price for the television set than we do when we go to our local grocery for the milk. This is even though most families spend more money on milk than flat-screens in their lives. One could of course argue that the feel-good factor of buying the milk in your local store where you bump into friends is a reason for going to the local store. Then you have the cost and time of getting to the cheap supermarket to get the best price of milk. Where you buy your milk is very much of a personal decision and the right price might not always be the lowest price.

When it comes to the financial markets there’s not a lot of wriggle room for personal preferences. The price of Siemens is the same in Frankfurt as it is in New York. If there is a discrepancy it will be arbitraged away. There are no free lunches. The fact that the prices are the same does not per se mean that the prices in Frankfurt and New York are right. They are right in relation to each other, but that is all you can say. The financial market participants spend a lot of time and effort to try and determine the right price of assets in an absolute sense as well. The duration of the assets makes the valuation quite a bit trickier than your average bottle of milk. How do you gauge future demand and supply for the company’s product?

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