Random Musings : "Overvalued" vs "Expensive"

A fairly short post, which to some may pose a fairly obvious point, but it didn't occur to me as apparently as it should have until quite recently during one of ボーイフレンド and my more robust discussions about the current state of affairs. With some light prodding, I was finally enlightened by the clear distinction between the difference between the concept of being "overvalued" as opposed to being "expensive", which is fairly important and hence worth dedicating an entry to.

To the untrained (or maybe just me), the two words can be considered somewhat interchangeable when applied to daily life references, there are in fact significant differences when applying these terms in a financial investment context. Expensive simply means that the investment vehicle is outside the purchasing power of the individual. Overvalued implies that said asset is priced above its intrinsic value, that is a function of its return and risk.

In an investment context a clear analogy would be an annuity promising to pay $10m to the holder every year indefinitely, sold for the price of $50m. Unless hyperinflation was a legitimate concern, there are very few who would consider the annuity to be an overvalued asset, although it would be considered expensive and outside of their purchasing power for the majority of people.

The reason for considering this is in consideration of the more recent developments in the fairly sharp rebound of equity prices after the Feb - Mar crash, something which will probably be covered in another entry in the near future, something to look forward to once I de-muddle my mind.

by 小福