Price and Value

Price and Value are two different things in value investing that sometimes connect each other in weird ways. Price is what people are willing to pay for the value. Value is a little bit more abstract in which its the received or perceived benefit for paying the price.

Price can go up and down. Affected by the people who participate in the market. It may or may not reflect the value of the thing it represents. Such as a stock.

A stock is a representation of a business. Its an ownership to a business. If its a private business and not traded in the stock market, the price would be somewhat near its value because two people are rational, having a deal, and educated. Like two experienced real estate investors having a deal. The price would be near the value. But when this business trades in the stock market, the price and its value sometimes near each other and sometimes there’s a wide gap. This is because the crowd is sometimes rational and sometimes not.

When the terrorist attack of 9/11 happened, all companies dropped. Even funeral businesses. This is a very peculiar thing to behold. A high number of death toll (though bad as it is) is a good thing for a funeral business. So why does it dropped? Its because of the people and its psychology. Good enough, after the situation settled down, stocks went up again and funeral businesses went up much more.

A value investor with the discipline to act, may have bought at these times when its hard to pull the trigger to buy.

This is what value investing is. Looking at its value. Comparing it with what the market deemed is the right price. And if its mispriced, buy it. If its overpriced, sell it. That’s the whole business of value investing. But its harder than most people think.

Most of the time the market is priced right. Waiting for it to become mispriced is a patience game. That is why most value investors would underperform when there’s a bull market. Mainly because stocks are priced correctly or overpriced. So what a value investor to do but to wait patiently. And sometimes, this situation is extended for a couple of years. Testing the discipline and patience of the value investor even more.

Sometimes the price drops and its warranted. The stock deserves to drop. A value investor now is in a different situation. He must know why the stock dropped. And if its warranted or not. The character that the value investor needs is that of skepticism. Which may bring him to the side of unpopular belief. An even harder emotion to master as you will be going against the crowd.

In summary, a value investor needs to:

  • know why the price is going down
  • form his own opinion
  • be willing to stand against the crowd
  • buy when its falling when you know you’re right
  • buy when value and price has a wide gap (undervalued)
  • have both confidence and self-doubt, arrogance and humility at the same time. Confidence and arrogance to say that everybody is wrong and you’re right. And self-doubt and humility to know that I may also be wrong.


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