Misunderstanding of price and value

price and value

Table of Contents

General retail investors mentality

The difference between price and value is the first lesson for all investors. As I said in section 5-2 of the book “The Rules of Super Growth Stocks Investing”, most people incline to buy penny stocks, thinking that low-priced stocks have more room to rise in the future and are less risky. In fact, the risk is relatively high. The reason why they become penny stocks is because the company’s operations have encountered an unsolvable dilemma, and the probability of resurrection is very low. “Investors should consider the value of the company, not the price.”

For long-term investors, especially growth stock investors, don’t See the tree but not the forest. The stock with high-quality and competitive are usually high-priced stocks; don’t argue the price with market, and never give up high quality stocks buying just because of several cents spread, and thus missed the opportunity to hold 10 times or 20 times the stock. You know, the potential growth potential of good companies is always unlimited (this is where the value lies).

Have Buffet evolve from orangutan to human

Munger also said that “good company stock prices are usually expensive.” Buffett said “Charlie Munger allowed me to evolve from orangutan to human as quickly as possible.” One of the most critical battles was the merger and acquisition of See’s Candies. Buffett later accepted Munger’s advice before buying See’s Candies.

The biggest change in the middle was that Buffett no longer insisted on adopting his teacher Graham’s ” Cigar Butt investment” method (see my other blog post Problems with cigar butt investment) — that is, no longer stick to the stock price only, instead, it will be included in the non-quantitative value when considering the intrinsic value of the stock (please see my another post Non quantitative factors determine success or failure of an investment“).

In 1989 Berkshire Hathaway shareholder letter, Buffett wrote “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first‐class businesses accompanied by first‐class managements.”

It will show the value paid for high-quality stocks

Charlie Munger ever said “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business
earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% re-turn—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”

price and value
credit: Freepik

Growth stocks are not cheap

If investors carefully examine all the stocks that have achieved at least 10 times or more than 20 times in the past, these stocks have been found to be high-priced stocks during their entire listing process. Until the growth slowed down and became a general stock (but at this time it has also risen dozens of times). Unless you are willing to take risks (don’t have this gambler mentality), or you are really expert, the company is within your circle of competence and buys the company’s initial listed stock at a lower valuation; otherwise, “it is impossible for ordinary people to buy any growth stocks at a cheap price.” Keep this in mind!


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