Thinking about prices

[i4value]

Warren Buffett said that “…investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices”

If you are a stock trader, price and volume data are critical information because the focus is on trading pieces of paper. The fundamentals and/or intrinsic values of the companies are not important

But, if you are a value investor, market prices are also important. You are buying and selling based on how the market price compares to the intrinsic values.

Both price and value are the two sides of the same coin. Understanding the difference between price and value is the core principle of value investing.

• While you can get the price of a stock (for listed companies), there are no quoted intrinsic values. In practice, you have to estimate the intrinsic values yourself.
  

• Different investors will have different estimates of the intrinsic value of a company.  While the stock price may fluctuate, at any one point, there is one price representing the thinking of the crowd at that time. The market price represents the perceived value by the crowd and is not the intrinsic value.
  

• Market price changes very whereas intrinsic value does not change on a day-to-day basis
  

These 2 views of what drives stock prices have given rise to 2 investing methods

• The technical school - those that use price and volume information as a proxy for market sentiments.  These people trade pieces of paper.
  

• The fundamental schools have value investors as one good example. These consider investing as being a part-shareholder of a company and as such view the business fundamentals as the main driver of value.
  

For more insights go to Can we learn anything from investment case studies?