Price and Value

"Price is what you pay. Value is what you get - Warren Buffett"

It is very important to understand the difference between price and value. Often times investors of stocks assume both are same. In fact, this concept is very important and in my opinion, to not just the stock investments but life in general.

One example that Mr. Buffett has quoted in the past to illustrate the point is the college education expense. Let's say for example that you have spent $50,000 dollars on your son/daughter college education. That college degree enables your kid to go and find a job that pays nice enough salary for the rest of his/her life. So, the price you pay is 50K but the value you are getting out of it is lifelong earning potential with a significant upside. That is just the tangible side of the equation. There are a lot of other intangible benefits as well like discipline, responsibility, sense of purpose, so on and so forth. The value in this case, is just undefined on the positive side. Those are the investments that you should look to make whether in real life or in stock markets.

Now applying the same principle to stocks. Price is your purchase price of the stock and the value is the intrinsic business value of the company. Intrinsic business value is the ability of the company to generate owner earnings consistently into a foreseeable future. I will have another blog post to illustrate the means and methods to estimate this intrinsic business value.