What It Means to Buy a Stock That’s “Undervalued,” Plus One Incredibly Undervalued Stock to Buy…

Take a look at what I’m holding:

This is a U.S. $100 bill.

Now, there is probably little doubt in your mind about what it is worth. $100 = $100.

Its value might fluctuate relative to other things. For instance, this $100 might have been worth… ohhhh, let’s say 11,000 Yen in 2021. But might instead be worth 14,000 Yen in 2022. (Shoutout to my Japanese clients !)

That is, the value of this $100 bill has undergone “deflation” relative to other currencies.

Or this $100 might have bought about 1,200 eggs from the grocery store in 2021 but might instead be able to buy only 300 eggs in 2022. That is, the value of this $100 bill has undergone “inflation” relative to the value of eggs.

But still, if we were to put this $100 bill in an envelope:

And then label the envelope with a “price”…

What should we write?

$100, of course.

Let us pretend that this envelope, containing the $100 bill, is an asset. We’ll call this asset a “stock.”

Now, here’s something to understand about the stock market (and the bond and real estate and derivatives markets too).

As I mentioned before, the actual value of money is constantly fluctuating relative to other things.

But in addition to this, the price that someone is willing to pay for something is “disconnected” from the value that something is actually worth.

Meaning, for example, that you can sometimes encounter a situation where an envelope with $100 inside of it is selling for $87 (or some other amount).

Sometimes this disconnection occurs for economic reasons.

A drawdown in the stock market might induce a margin call for a big investor, forcing them to sell lots and lots of stocks at a loss, causing the price to decline despite the fact that there’s no change to the actual business itself.

[A margin call occurs when a broker or lender demands that an investor provide additional cash or assets to cover possible losses.]

Or someone might need cash quickly, which compels them to sell their house at a sharply discounted price.

But sometimes, divergences between price and value occur for irrational or incomprehensible reasons.

Whatever the cause, identifying these disconnections between price and the underlying worth of an asset is the heart of what’s called “value investing.”

Anyone who’s ever bought an expensive Versace bag on sale already fully understands this concept of “disconnection.”

Anyone upset that a tank of gasoline now costs more than it did a year ago understands this concept of “disconnection.”

Value investors go hunting for opportunities in the stock market that seem “mispriced,” where the value and price of an asset have disconnected from each other.

In fact, one of the most well-known discoveries in finance found that “value” is one of the key factors that explain the market-beating returns of some stocks.

It’s also the investing approach taken by some of the greatest investors of all time: Seth Klarman, Bill Ackman, Joel Greenblatt, David Einhorn, Charlie Munger, and of course Warren Buffett.

It’s the investing approach I take with all of the investments currently recommended by DIYwealth’s flagship newsletter, Living Rich Monthly, including the stock I recommended this month.

That’s because the current drawdown in the stock market has created a lot of opportunities to find incredible value…

Stocks that have gone down in price despite the underlying business actually growing, with all signs pointing toward these companies continuing to grow in the future.

I’ll get to that.

First, I want to test you to see what kind of investor you are.

The Folly of Price-Based Investing

Let’s play a game.

Would you want to invest in this stock in a boring industry that plummeted 30% from its highs:

Or would you rather invest in this tech stock with a breakthrough new technology that climbed over 500% in less than two years and looked primed to climb higher:

Now, you are probably already anticipating where this is going to go…

“Obviously,” I hear you say, “this is a trick, and the stock that looks unattractive will be the better investment.”

And you are correct.

But why?

You might respond, “Well, I don’t know enough. I’m only looking at the price. I need more information.”

And that, my friend, is the primary point I am trying to make today.

I’ve been in financial publishing for years. I grew up roaming the halls of a brokerage office. I’ve been thinking about stocks and listening to the logic of people’s buy and sell decisions since I was a child — nearly 30 years.

If it’s one thing I’ve learned over the years, it’s this: People do NOT like to buy stocks when they’re cheap. But they LOVE buying stocks that have already skyrocketed.

The average investor bases the majority of their buying and selling decisions on price alone.

Show someone a stock that’s been climbing, and the fear of missing out kicks in. People highly desire it.

Show someone a stock that’s declined for any reason that has nothing to do with the health and stability of the business… and nobody is interested. Trying to convince the average investor to buy a stock that’s gone in price is more challenging than selling water to a fish.

You know the rule of investing, “Buy low, sell high”?

Well, the vast majority of investors do the opposite: They buy high and sell low.

It’s a terrible tragedy. But I understand why this happens to many investors.

Part of it is psychological, as I mentioned. But another part of it is misunderstanding.

People confuse price with value because they often do not understand what they’re buying when it comes to stocks.

See, when you buy a stock, you’re actually buying a thing.

Specifically, you’re becoming a co-owner of a company, legally entitled to a share of that company’s value.

The CEO and directors of a company have legal and moral responsibilities to shareholders of the company.

A good investment, then, is contingent upon a company’s potential and ability to provide value to shareholders...

And information about this potential and ability is not always reflected in a stock’s actual market price.

That seems like a simple insight, but it has huge implications for you.

Once you understand these implications, it will change your whole mindset about investing and enable you to invest with less risk and greater certainty and security.

Failing to understand this, the difference between the market price of an asset and what an asset is actually worth, is one of the reasons why most people fail to make much money in the stock market in the long run.

It’s also why people miss out on big opportunities, such as the one we are facing this very moment in time, because they have a warped idea about where big gains in the market come from.

I have a personal example of this happening in my own family.

My dad once tried to convince my grandmother to invest in Warren Buffett’s company, Berkshire Hathaway, around 1990.

My grandmother called my dad an idiot.

“There’s no way I’m investing any money in a stock that costs $7,300 per share,” she said.

Well… buying just 3 shares of this stock at that time would have made her a millionaire today.

Berkshire Hathaway is practically the gold standard when it comes to well-managed businesses that treat shareholders well, and has been that way for decades.

That doesn’t matter, though.

She saw the price. She didn’t see the value.

And because of that, she missed out on a chance to multiply her money more than 50 times over.

Are you going to make the same mistake?

Let’s see…

On Monday, I’m going to release to you, for free, my stock recommendation in this month’s issue of Living Rich Monthly.

Why am I doing this?

Well first, look back at the first chart I showed you today, the one with the stock price that’s currently down 30%.

It belongs to the company I’m going to reveal to you.

In other words, I’ve uncovered a company with the exact situation I described for you today: An amazing company with a price that’s completely disconnected from its actual value.

But the second reason I’m going to release this stock pick to you on Monday is because I genuinely want to know…

Do you have the guts to buy it?

Do you have the guts to take the steps necessary to reach your financial goals — now and in the future?

Do you have the cajones to actually better your life?

Because if you don’t, then why are you here… still reading this?

What is it going to take for you to act?

On Monday, I’m going to keep doing my part by telling you everything you need to know to build wealth yourself.

Will you do yours?

Let’s find out.