Value vs. price
Price is what you pay; value is what you get.
In One Sentence
Price is the money you pay; value is what something is worth because of the profits behind it — and the two are often not the same.
Why It Matters
The less you pay, the more you get for the same thing. Plenty of people know to wait for the big annual sale before buying a new appliance, yet with stocks they scramble to buy as prices climb and run the moment prices drop. Here's how I use the idea: when fear pushes prices down too far, I buy more with new income; when prices run high, I don't sell either — I just don't borrow and don't add extra.
One Number
A high price doesn't mean high value. All the gold in the world, worth about US$9.6 trillion, could buy all the farmland in the US plus 16 ExxonMobils, with money to spare. A century from now, the farmland and the companies will have kept on producing, while the gold will have produced nothing (Buffett's 2011 letter to shareholders · Chapter V).
In the Book
The "Buying Low" section of Chapter V uses it to show that the price you pay shapes your results, and counts low costs as part of a low price. Chapter III introduces Graham's idea of intrinsic value.
Go Further
- Benjamin Graham He taught us to look at value and price separately.
- Margin of safety The gap between the two is the margin of safety.
- Mr. Market What the market shouts at you every day is a price, not a value.
- Fees and costs Fees are part of the price you pay, too.
- Buying in crashes When prices fall too far, buy more with new income.