Value Investing: There’s a Price For Everything

Read the following two paragraphs from a recent real estate brokerage house white paper and tell me which real estate markets seem riskier to you, primary (gateway cities like New York or Los Angeles) or secondary (smaller cities like St. Louis or Phoenix):

“Notable shift back to primary markets indicating a current resistance to market risk. After the continued expansion into secondary markets over the last two years, volumes are moving back toward primary markets. In the second quarter of 2016, 70.1% of total transaction volume took place in primary markets. This represents only the second occurrence of the last eight quarters in which primary volumes exceeded 70.0%.

Pull back in risk evident on submarket level as well with investment clustering increasing. Office investment ‘sprawl’ is declining as investors adopt a heightened focus on lower risk submarkets amidst market jitters and cycle longevity concerns.”

Did you say secondary markets? Why?

The word “risk” is mentioned three times in those two paragraphs, while the word “price” doesn’t get a single mention. How is that possible? Price is the number one determinant of risk. Without knowing the price of something, how can you reasonably assess the risk? Hint: you can’t.

There’s a price for everything. Value investors understand this, while others choose to ignore it. Is New York City a more dynamic market than St. Louis? Of course. Would you pay one price for a building in St. Louis and double that price for the same building in New York City? How about triple that price? The answer may differ for different investors, but one thing is for sure: price matters.

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