When one reviews the current consensus holdings for the universe of gurus, one thing becomes very clear – value is very subjective. Investors such as Buffet, Berkowitz, Price, etc have proven to be excellent allocators of capital. They are all considered value investors, yet each has a very different process when it comes to stock selection. It took me many years to learn that value investing isn’t simply trying to buy a dollar for fifty cents or buying low P/E stocks. This leads me to the discussion of value being very subjective. While this sounds like a fairly obvious statement, I believe it requires a great deal of consideration in order to truly understand.
One man’s garbage is another man’s treasure. That cliché certainly applies to the investment world. As with many previous discussions, investor psychology plays an important role in our decision making process. In order to achieve the correct balance, we struggle between the two forces of value (or sometimes referred to as ‘true’ price) and actual price. Our human desire for control and certainty lead us on this never ending quest. If we could simply determine a ‘true’ value, then actual price will surely follow. Unfortunately, we are unlikely to ever unite these two concepts of price and value.
It seems as though value (or ‘true’ price) should be somewhat constant. The value of a business should be straightforward, right? It’s easy to determine actual price- simply go to today’s newspaper, call your broker, or go online to get a quote. Determining value on the other hand is inexact at best. Why is it so hard? There are libraries full of texts and academic theories as to how to determine a securities value. Well, the simple, but I believe correct answer, is that there really is no true value. The only true constant is actual price. This doesn’t mean that the latest price reflects an accurate value of a firm’s prospects. It simply means that actual price (not “true” price) is the only thing we know with certainty.
A newsletter devoted to the psychology of investing published an interview pertaining to this subject. {In an interview with Innerworth, market observer Sam learned years ago from trading on the floor of the exchange that the financial markets are nothing more than the same kind of marketplace we see on any popular auction site. "When I saw how people made money on the trading floor, I realized it was nothing more than a marketplace. A buyer tries to take advantage of a seller and a seller tries to take advantage of a buyer," Sam observes.
What is the "true" price? It's all a matter of opinion. Buyers try to buy low and sellers hope to sell for a profit. But in the end, it's difficult to accurately gauge the "true value" of a stock, and thus, some traders win and some traders lose. As Sam observed on the floor, "You often see people buy something that is much too expensive, and see people selling at a price that, according to the chart, is much too cheap." It makes you wonder if there is a reasonable way to estimate what the optimal price of a stock is, but Sam argues, "The truly objective information on a price chart are areas of support and resistance. Support is where we find willing buyers. Resistance is where we find areas of willing sellers. Any time you see these facts, focus on them. And then focus on the trend." Trading profitably is often a matter of making an educated guess as to how much the masses will pay. Just like PlayStation 3, it doesn't matter what the list price is; all that matters is what people will pay at any given time. And that's how the markets work. If you can get in and get out at the right time, you will make a profit. If you buy too high, or sell too low, you will miss out.}
Our task is clear, yet difficult to execute- determine an estimate of ranges for a security’s value and always buy at or below this estimate- sell above the estimate. To reconcile price and value is always difficult. If we accept actual price for what it is, we may be much more content in our investment approaches.
One man’s garbage is another man’s treasure. That cliché certainly applies to the investment world. As with many previous discussions, investor psychology plays an important role in our decision making process. In order to achieve the correct balance, we struggle between the two forces of value (or sometimes referred to as ‘true’ price) and actual price. Our human desire for control and certainty lead us on this never ending quest. If we could simply determine a ‘true’ value, then actual price will surely follow. Unfortunately, we are unlikely to ever unite these two concepts of price and value.
It seems as though value (or ‘true’ price) should be somewhat constant. The value of a business should be straightforward, right? It’s easy to determine actual price- simply go to today’s newspaper, call your broker, or go online to get a quote. Determining value on the other hand is inexact at best. Why is it so hard? There are libraries full of texts and academic theories as to how to determine a securities value. Well, the simple, but I believe correct answer, is that there really is no true value. The only true constant is actual price. This doesn’t mean that the latest price reflects an accurate value of a firm’s prospects. It simply means that actual price (not “true” price) is the only thing we know with certainty.
A newsletter devoted to the psychology of investing published an interview pertaining to this subject. {In an interview with Innerworth, market observer Sam learned years ago from trading on the floor of the exchange that the financial markets are nothing more than the same kind of marketplace we see on any popular auction site. "When I saw how people made money on the trading floor, I realized it was nothing more than a marketplace. A buyer tries to take advantage of a seller and a seller tries to take advantage of a buyer," Sam observes.
What is the "true" price? It's all a matter of opinion. Buyers try to buy low and sellers hope to sell for a profit. But in the end, it's difficult to accurately gauge the "true value" of a stock, and thus, some traders win and some traders lose. As Sam observed on the floor, "You often see people buy something that is much too expensive, and see people selling at a price that, according to the chart, is much too cheap." It makes you wonder if there is a reasonable way to estimate what the optimal price of a stock is, but Sam argues, "The truly objective information on a price chart are areas of support and resistance. Support is where we find willing buyers. Resistance is where we find areas of willing sellers. Any time you see these facts, focus on them. And then focus on the trend." Trading profitably is often a matter of making an educated guess as to how much the masses will pay. Just like PlayStation 3, it doesn't matter what the list price is; all that matters is what people will pay at any given time. And that's how the markets work. If you can get in and get out at the right time, you will make a profit. If you buy too high, or sell too low, you will miss out.}
Our task is clear, yet difficult to execute- determine an estimate of ranges for a security’s value and always buy at or below this estimate- sell above the estimate. To reconcile price and value is always difficult. If we accept actual price for what it is, we may be much more content in our investment approaches.
