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About a month ago I was at the warehouse store. Going down the spices and baking aisle I almost fainted into my supersized cart. The price of a bottle of vanilla was $27.99 for slightly less than half a litre. I thought back to the many times I baked and spilled my vanilla or put too much.(Don’t worry the family never noticed).
I like to always have a spare on hand. The spare bottle of vanilla in my basement I bought a while back cost me less than $10. And silly me, I thought that was pretty expensive.
My vanilla story illustrates how the stock market functions. Scarcity and demand drive up the price of a company stock or in the case of vanilla, items to buy. Demand and scarcity are interconnected. Now had I had any inkling of the price increasing 3 times back when I bought my spare bottle of vanilla what would I have done?
Even the perception of value can cause the price of a stock or good to increase. If Ice cream lovers and bakers’ favorite flavor continue to be vanilla guess what? Already since my observation of a price of $27.99 the price has increased to $29.99. Would you pay that much for a bottle of pure vanilla?
If the price keeps increasing, however, there will be a point that sweet tooths will say, “enough!” and switch to artificial vanilla or say smoked chipotle pepper. Economists have fancy words for those price movements but the more important principles here are that the investment managers we choose together who work on your behalf.
Investments managers with the support of their research staff participate in the stock market, buying and selling company stocks at opportune times. They are professional investors, unlike the investing public which is made up of individual investors. They have knowledge, experience, and expertise. They meet with management of companies to ask the difficult questions, and their staff has access to data not available to most people.
Investment managers often have predetermined target prices and will sell a stock once that price is reached. Many also do not want to overpay to buy a stock. The managers we choose together mitigate risk, they do not want to permanently lose the capital they have been entrusted with. Also their professionalism allows them to understand which geopolitical events will influence the stock market and which are simply noise.
So next time I attend a presentation I will ask the presenter if his or her favorite flavor is vanilla and if they are buying stocks in companies that manufacture vanilla. And maybe I will have to find another flavor to put in my baking.