Understand the difference between price and value from "summary" of The Little Book of Value Investing by Christopher H. Browne
Price and value are two concepts that are often conflated but are fundamentally different in the world of investing. Price refers to the amount of money you have to pay to own a certain asset, such as a stock or bond. It is the number that you see quoted on financial news websites or trading platforms, and it is what most people focus on when making investment decisions. On the other hand, value is a more subjective concept that is determined by the intrinsic worth of an asset. It is based on the underlying fundamentals of a company, such as its earnings, cash flow, and growth prospects. Value is what savvy investors focus on because it allows them to identify opportunities where the price of an asset is lower than its true worth. Understanding the difference between price and value is crucial for successful investing because it can help you avoid overpaying for an asset. If you focus solely on price, you may end up buying an asset that is overvalued and destined to underperform in the long run. However, if you focus on value, you can identify assets that are undervalued and have the potential to generate strong returns over time. One way to think about the relationship between price and value is to consider the concept of margin of safety. This concept, popularized by legendary investor Benjamin Graham, suggests that investors should only buy an asset when its price is significantly below its intrinsic value. By doing so, investors can protect themselves against downside risk and increase their chances of achieving attractive returns.- Price is what you pay for an asset, while value is what you get in return. By focusing on value rather than price, investors can make more informed and rational investment decisions that are based on the underlying fundamentals of a company. This approach can help investors avoid costly mistakes and increase their chances of building wealth over the long term.
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