“Price is what you pay, value is what you get.”
Warren Buffett
Value and price are quite different things. Yet, value and price words are usually used as a synonymous, even by finance news writers.
Let’s try to understand the difference through an example.
Let’s imagine that you need a new smartphone, and you want a specific model of your beloved brand. You are hesitating, because the price is very high: after a brief check on online sites, you have realized that you should pay around 1000$.
Then Black Friday arrives and suddenly the price of that model drops to 600$ !
Did the value of the smartphone change?
NO.
The value of the the smartphone is always the same: same functions, same materials, same brand…. WHAT YOU GET is exactly the same
Did the price of the smartphone change?
YES.
The worth (or value) didn’t change, but the price decreased… WHAT YOU PAY has changed.
If you consider investing in stocks, things are pretty much the same: to GET a piece of ownership of a company which has a certain value you have to PAY a certain price.
To be a good value investor you have to behave like a business owner: you have to understand the company and you have to – after studying it – estimate its VALUE, and if you decide to make the investment then you buy a percentage interest in that business proportional to the number of share that you get.
To get a certain number of stock shares in a company, you have to pay a specific PRICE. For public companies, you pay when you buy from a stock exchange like the NYSE or the Nasdaq.
When you see all the crazy changing numbers ticking in red and green on your Yahoo Finance app or similar, you see the stock prices. Not the stock values. Do not confuse the 2 things.
Value investing consists in buying a stock when its price is (heavily) below its value. There are many implication of this; we will talk about the margin of safety and long-term impacts in another post.
Anyway, please remember: just looking at the price is not investing.
Wise Value Investing 