Price vs Value: The Core Concept 💎
This might be the most important lesson in your investing journey. Master this concept, and you'll think differently about every investment decision.
The Big Idea
Price is what you pay. Value is what you get.
They're not the same thing—and the gap between them is where money is made (or lost).
The Used Car
Imagine two identical Honda Civics, same year, same mileage, same condition:
- Car A: Listed at $15,000
- Car B: Listed at $22,000
Same car. Same value. Different prices.
Which would you buy? Obviously Car A—you're getting the same value for less money.
Stocks work exactly the same way. Two companies can have similar "value" but trade at very different prices. Smart investors find the Car A's of the stock market.
What Determines a Stock's Value?
A company's true value comes from:
1. Current Earnings
How much profit is the company making right now?
2. Future Earnings
How much will it make in 5, 10, 20 years?
3. Assets
What does the company own? (Buildings, cash, patents, brand)
4. Competitive Position
Can it maintain profits, or will competitors eat its lunch?
5. Management Quality
Are the people running it competent and honest?
What Determines a Stock's Price?
Price is driven by:
1. Supply and Demand
How many people want to buy vs. sell right now?
2. Market Sentiment
Is the market optimistic or pessimistic?
3. News and Headlines
What happened today that's making people react?
4. Momentum
Is the stock trending up or down?
Key Takeaways
- Price = what you pay (set by the market)
- Value = what you get (determined by business fundamentals)
- The goal: buy when price < value
The Three Scenarios
| Scenario | What It Means | What To Do |
|---|---|---|
| Price < Value | Undervalued — You're getting a deal | Consider buying |
| Price = Value | Fairly valued — You're paying fair price | Hold if you own |
| Price > Value | Overvalued — You're overpaying | Avoid or sell |
Why Prices Diverge from Value
In the short term, prices can wildly diverge from value because:
- Emotions — Fear and greed drive irrational decisions
- News overreaction — One bad quarter doesn't destroy a great company
- Herd behavior — People follow the crowd
- Algorithmic trading — Computers react to patterns, not value
Warren Buffett's Wisdom
"Price is what you pay, value is what you get." Buffett has made billions by buying great companies when their prices temporarily fell below their true value.
How ShareValue.ai Helps
This is exactly what ShareValue.ai is designed for:
- Valuation Score — Is the price low relative to earnings, assets, and sales?
- Quality Score — Is this a good business worth owning?
- Final Score — Combining everything to find undervalued quality stocks
When you see a high ShareValue score, it often means: good company + reasonable price = potential opportunity.
The Patient Investor's Edge
Here's the beautiful thing: prices eventually converge to value.
- Overvalued stocks eventually fall
- Undervalued stocks eventually rise
- The market is a weighing machine in the long run
Your job isn't to predict when—just to be on the right side when it happens.
Price vs Value Traps
- Thinking a low stock price means it's cheap (a $5 stock can be overvalued)
- Thinking a high stock price means it's expensive (a $500 stock can be undervalued)
- Confusing price movement with value change
- Buying just because the price dropped (it might have dropped for good reason)
Next up: Let's dive into earnings—the engine that drives stock value.