Note: Following Mr. Ge Ba’s previous article “Ge Ba’s wonderful views on price and stop loss”, he put forward a wonderful palindrome view on my previous article “The Misunderstanding of Price and Value”. Yesterday, thanks to his willingness to sacrifice rest and spend a lot of time on holidays, based on recent volatility in growth stocks, provided his deeper view on “value” and “price”, and analyzed Graham and Buffett’s intention. The following is the original version, shared with readers. Andy would like to thank Mr. Ge Ba on behalf of the readers.
My palindrome mentions the difference between “valuation” and “price estimation,” because that’s what the book Security Analysis taught me (I read the 1934 edition), and my letter to Buffett and the Q’s of previous shareholder meetings What &A says is verified again and again.
In your article “The Misunderstanding of Price and Value”, although you kindly mentioned “don’t be too expensive for growth stocks” and “calculate about the slight bid-ask spread”, I hope everyone understands the value of growth stocks. In some cases, it should be correct. But I worry that people will misunderstand: “The price of growth stocks can be chased”. Because you don’t seem to have clearly explained “what is the standard” to everyone?
In particular, your book does not clearly separate the “valuation” methods such as P/E and P/S from the “objective valuation” methods (the term “valuation” is used in the same way). It will lead to the “intrinsic value” calculated by the “objective” method is lower than the “current market price” (it should mean to start to wait patiently), but I changed to “comparative” P/S, P/E, P/B valuation method, other comparison companies are so expensive anyway, so I buy a little higher price, and there is no problem.
The question is, why is the market price so high now? I think it’s because of the ultra-low interest rates that we’ve never seen in history. Security Analysis 1934 ed. Ch 4 mentioned that in 1928-1929, investors frantically invested in the “blue-chip stocks of growth stocks” at that time, which caused the prices of these blue-chip stocks to continue to rise. After that time, investors repeatedly changed their valuation standards:
“Investors have ignored “firmly established standards of value”, “the market made up new standards as it went along” Investors have repeatedly changed price standards, by accepting the current price-however high- as the sole measure of value”
Just like the current situation. Ben Graham stated in the book: “standards of safety: by the application of definite and well-established standards”, that is, to use an objective standard to “value” to protect the safety of your principal (investment Definition). I believe that the application of these standards to the “growth value investing” we now advocate should still be the calculation method of the intrinsic value that Buffett said: “determined by the cash inflows and outflows-discounted at an appropriate interest rate- that can be expected to occur during the remaining life of the asset”
Ge Ba deeply believes that this method is “valuation”, other methods are “price estimation”, follow the “price” of the market to “valuate”, if you really want to buy anything, your “willpower” will let you buy it There is no need to wait.
Moreover, Andy encourages everyone: “Don’t worry about the price of growth stocks because of the high price” and “slight bid-ask spreads.”
It’s just that Ge Ba has recently researched many pharmaceutical and biotech companies. My God, I don’t know when these companies will make money (I don’t even know when FCF will have the opportunity to become positive), and I can’t estimate the value at all, but the market is because of these companies. The revenue continues to grow, and it is considered a “super growth stock”, and it is a big buy and a special buy (anyway, those who want to buy will always estimate the bid).
However, Ge Ba believes that the cycle of raising interest rates has begun, and asset prices are beginning to go down, which means that the tide is beginning to recede, which means: “Naked swimmers are beginning to show up…”
Ge Ba believes that not only “value” and “price” are different, but also “valuation” and “price estimation”, there is an absolutely objective method. If you can’t “value” a company, you don’t know enough about it, “you have no business buying that stock” (Buffett said).