Nominal and Real

Let me start by asking you a question: if a stock that usually traded at around 10.00 now trading at 0.50, is that stock cheap?

I did a survey and asked 150 people that involve in stock market and guest what, 112 of them immediately say yes, it's cheap and they want to know the name of the stock so that they can buy it. 27 of them say depend on occasion and the stock itself and 11 of them say they won't touch this kinda stock.

Well, 75% of my sample think the stock is cheap without even know the name of the stock and other information about it.

That's what i mean in this article, most of us tend to look at nominal value and ignore real value. Real value in economic means adjusted value (usually inflation adjusted). Most of us do not care about real value of an asset as long as we get higher nominal value.

This kind of thought lead to those 75% of people think a stock that usually traded at around 10.00 is cheap at 0.50. However in reality, 0.50 may not be cheap if it's adjusted.

Even professional stockbrokers are doing the same thing. They recommend stock based on nominal value. They don't even find the real value of a stock adjusted to inflation, earning or earning per share. (if you don't believe me, try ask them!!!)

Similarly, the high of 14000 for Dow in Oct 2007 is just a nominal value, if we adjusted with US dollar, we can see that the real value of Dow adjusted using USD is well below the 2001 level. Here are the video done by Don Harrold on Youtube



If we study the topic more, we can see that strong rise in precious metal is caused by severe drop in USD and not other currency. The Gold / Euro value is still below it's high at March of 2008. In other word, Gold's nominal value is rising (as gold is in USD denominated) but its real value is stagnant. So next time you wanna buy share of gold stock, think again.

In conclusion, nominal value of an asset is useless. If you can't get the real value of an asset, don't say it's cheap!