While learning about value investing, one of the first concepts that I had to understand was the difference between price and value. This is the core concept that differentiates value investors from everyone else. Let’s talk about this in detail.
Before I became a value investor, I was a, for lack of a better work, speculator (2012-2015). I was thrilled when the market went up, and I got nervous when the market went down. From pre-market till market close, I was constantly checking how my stock picks were doing. When I was in the green, I was thinking about whether I should cash out the profit? When I was in the red, I was looking at every tick hoping that the price would turn around and make me a profit. The stock price constantly dictated my emotions. I guess you can say that I was a slave to the stock market. Once I realized the difference between value and price, I quickly switched to the ways of value investing. I vividly remember that it was the summer of my sophomore year at college when I started learning about value investing, and I haven’t looked back since.
The price of a stock constantly fluctuates – the price might be down 2% right now, then up 5% in a couple hour, and close being down 8%. So, how can you master the art of figuring out the price moves. Well, some of the technical/momentum traders might disagree with me, but I have learned that it is simply too hard to predict the future. In a future blog post, I will talk about the mentality of technical traders and why they would disagree with my previous statement. However, let’s focus on the fact that price is constantly changing, and it is impossible for an average investor to predict what the price will be the next second. So, how is price different from value?
Warern Buffett answered that question perfectly! Price is what you pay; value is what you get. Price is simple; it is basically the “price tag” that the market has given the stock. In other words, price is what the stock is currently trading at. On the other hand, finding the value of a stock is an art. It is not as simple as searching the stock ticker on google. For this reason, I find value very interesting. Value of a stock can vary from person to person. You might find the intrinsic value of a share of Amazon to be $2000, and I might find it to be $1000. Now, who is correct? Both of us could be right. We could have assumed different margin of safety, which yielded us different results. So, instead of the market giving a quotation for the traded security, you are the one evaluating the worth of the traded security. This is precisely why fluctuations in the stock market do not play with a value investor’s emotions. Knowing the value of stocks, value investors look for stocks that have been mispriced by the market i.e. when the price of the stock is lower than the value. When there is such a discrepancy between value and price, the value investors pull the trigger and buy. You can think of market drops in the stock market as black friday sales. You are getting that $1200 (value) iPhone for $600 (price). So, during volatile times, when market is dropping, this is when value is created. Price of a stock can go up and down, but the value of a stock stays steady (as long as nothing drastically changes in the company).
Hope you learned a little and found this blog post helpful. We talked about the difference between price and value. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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