Isn't the price all that matters?
Today I had an interesting piece of correspondence from ‘Victor’. Victor writes:
You talk about value of a Company, but reality is the value of an asset is what a buyer will pay for it, so is it not true that at any moment in time, the value of a Company is what the market is willing to pay for it. During the .com days, that was all that counts, there were no intrinsic value at all.
What Victor is suggesting that the value of an asset is simply what someone else will give you for it. In other words the price. But an asset is not worth what someone else will pay you for it. What someone else will pay you for something is the Price. Price and Value are two different things. Go and research the company NetJ.com. Its IPO price was 50 cents, it listed in November of 1999 on the OTCBB in the US around $2 and at the peak of the internet bubble traded at a price of more than $8.00 but according to its prospectus, it actually “conducted no substantial business activity of any description” and “had no plans to conduct any substantial business activity of any description”. So was NetJ.com ever worth $2, or $8.00? Of course not. The price was $8.00 but the value was much, much lower.
Price is not value. Your job as an investor is to buy great businesses when their price is less than the value you receive. The difference between a price that is lower than the value, is known as the Margin of Safety. Warren Buffett and Benjamin Graham argue that those three words are the three most important words in investing.
Posted by Roger Montgomery, 3 December 2009
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Deep
:
Dear Roger,
Thanks for your perspective on value and price.
So I have a complex situation here :
I paid a price of $22 to buy WES in 2008 ,the value was $28.So I had a margin of safety of 17% or so.Today the price is $29 and the value is $ 30 is it a time to sell and if yes is it not a short term investment.
If I sell shall I park my money in another stock with a good Margin of safety which I think is difficult to find.
Your advise please
rogermontgomeryinsights
:
I cannot advise you about what to do with Wesfarmers. My valuation for Wesfarmers today is vastly different to yours. Regarding the subject of selling, its always a difficult decision and I believe there are five main reasons for doing it. I list them in a chapter of my book which will now be released in March.
Chris
:
I prefer to delineate it in terms of price being “what you get for it in dollars” and value being “what it can do for you”. A pair of shoes has a price, but also has a value in terms of what it can do for you, how many outfits it can go with, how comfortable and stylish they are, how long they will last etc.