Know The Difference Between Price And Value

Warren Buffet says: “The stock market is filled with individuals who know the price of everything but the value of nothing.”

To an active investor, it may seem like stock prices are always being thrown in their faces. And it’s true; investors love to fixate on ticker quotes flashing across the screen.

Ironically, Warren Buffett says that stock prices sometimes have very little correlation to their actual value. That’s why it’s important to know the difference between price and value when choosing your stocks.

 “Price is what you pay. Value is what you get,” says Warren.

At their core, stock prices are volatile and can fluctuate wildly, while value tends to remain static. Sometimes, prices can drop dramatically, but they are no indicator that the value of the company has fallen.

For example, during the financial crisis of 2008, there were countless bargain stocks available for purchase because investors were selling with abandon. Many of these companies are doing quite well today and are actually among the most successful in their industries.

In other words, a company’s stock price was separated from its true business value.

Warren himself shares that, during the financial panic of late 2008, he did not even consider selling his farm or New York real estate even though a recession was clearly imminent.

“And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it,” he relates. “So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well.”

As long-term investors, it’s best to heed Warren’s advice and purchase quality companies when they are selling at low cost. We can never be certain of a company’s long-term success, but we need not be influenced by the stock’s dropping price. Instead, it would do us good to learn how to distinguish between price and value, so we can concentrate our efforts on high-quality companies that will earn us high returns.