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Investors Know The Price of Everything & The Value of Nothing

“The stock market is filled with individuals who know the price of everything but the value of nothing."
– Phillip Fisher
Newcomers and seasoned investors alike often fall into the trap of conflating price and value. The two are different, however, and often don’t equal in the stock market or in other arenas of finance and life. Some will say that a stock’s worth is whatever someone will pay for it. Well, if it’s overvalued – I won’t pay for it. There is no value to be had for me. Someone else though may pay whatever price the greater market affords to a stock based on optimism and other factors. Price is easier to obtain because it is objective – you go to a finance site like Yahoo Finance and WHALA! The stock price is right there for the whole world to see. Everyone knows the price. But value, that is subjective, and something you have to discern for yourself.

Investors often engage in herd mentality.

Investors often engage in herd mentality, bidding up stocks to astronomical levels because the company is revolutionary or it has been performing well as of late – but what is that really worth? $100? $100,000? $1,000,000? Infinity? Saying a company’s stock price is justified because it’s going to take over the world; revolutionize an industry; cure cancer; or the best one (because it’s going to go higher) is insane. People said that the internet was going to change the world… and it did! That didn’t stop internet stocks from crashing down in 2000, bringing the greater market down with it. The NASDAQ, the stock exchange with a technology focus, only recovered its losses from that period just this year. Fifteen years later! Still, with respect to earnings, the NASDAQ traded five times higher in 2000 than it does now. Think about it. All that optimism led people to believe that the new technology stocks were worth five times more in 2000 than where they are today. Is that crazy or what!? Said another way, you were paying $100 for $1 in earnings back then compared to paying $20 for that same $1 in earnings today.

Investors were caught up in the internet and technology changing the economy and how people do business during the bubble, but they failed to differentiate between the price of the stocks they were trading and the value of the underlying companies. Warren Buffet remarked that one of the reasons he liked his investment in Wrigley, the chewing gum manufacturer, was because it was boring – the internet wasn’t going to change how people chewed gum. Buffett found value where others didn’t. Other investors were gambling in the stock market hoping that the price of their stocks would go up and up and up. After the bubble pops, however, you can pick up some of those same stocks that were trading at astronomical levels at rock-bottom valuations. In that instance, I’m reminded of the saying that one man’s trash is another man’s treasure. That’s when I really like a stock – when everyone hates it and is selling it. Like Buffett with Wrigley, I show deference to the ones that have good long-term economics working in their favor.

Price is what you pay and value is what you get. Remember that whether you’re buying a stock, a car, a house, or a sandwich. I’ve been to numerous places that charge me $10 for an average sandwich, while the place that charges me $5 not only gives me a bigger sandwich but a better tasting and fulfilling one. The same holds true for investments, but people seem to forget that. In the long-term, it’s usually the average sandwich that comes down in price and the better one that goes up in price, but the value has always been the same. So next time you’re shopping, eating out, or investing – before you buy – remember to ask yourself if there is value in the transaction for you. Learn from Phillip Fisher and identify the value of things you buy and not just the price of them.

- Andrew Sebastian

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