cash flow – I am reaching out to you to understand the difference between price and value. I am particularly interested in knowing what we should prioritise before making an investment — should it be the price or the value? I look forward to reading your detailed explanation on this topic. – S.
Veena Vijay It’s an interesting question. Every investor must know the difference between price and value before making investment decisions.
In simple terms, ‘Price is what you pay; value is what you get. ’ The idea traces back to Benjamin Graham, regarded as the father of value investing.
However, American investor and philanthropist Warren Buffett popularised his mentor’s thought in this crisp and memorable form. Let’s now explore the difference.
Suppose you hold a stock of Magi company and its current market price is ₹300. On any trading day, the share price may swing wildly, rising and falling drastically in a jiffy.
The fate and fortunes of shareholders holding Magi’s stock can seem to change overnight if they panic and rush to sell during these fluctuations. But that doesn’t mean that in the morning Magi opened a new branch, sales skyrocketed, profits peaked in the afternoon, and by evening the company shut its factory and reversed all its sales.
The real business value of Magi doesn’t change so dramatically in a single day or a week. Therefore, investors must understand that price is just a reflection of what the market is willing to pay at a particular moment. It is determined by demand, supply, liquidity, sentiment, and even geopolitical tensions.
Prices can change every minute because they are influenced by emotion and perception. In short, price reflects market sentiment, not intrinsic reality.
Value, on the other hand, represents the intrinsic worth of a business. It is the real strength of the company, determined by measurable fundamentals such as earnings, cash flow, assets, growth potential, competitive advantage, financial stability, debt and management quality.
Analysts use models such as the Discounted Cash Flow (DCF) method or Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios to estimate intrinsic value. While price reflects the market’s opinion today, value reflects the company’s reality over time. Regular investors need not worry about the math and it’s enough to understand what these metrics indicate about a company’s financial health and growth potential.
There are many instances where price deviates from real value. During phases of herd behaviour, investors tend to buy when others are buying and sell when others are selling, which drives prices away from fundamentals.
Similarly, speculative bubbles such as the dot-com boom of the early 2000s inflated prices far beyond their underlying value. Investor emotions such as greed and fear also create massive short-term volatility. News and headlines can change prices in the short term, but the intrinsic value of a company cannot be altered completely in a day.
For instance, when Elon Musk tweets about Tesla, the stock price might fluctuate sharply, but the firm’s intrinsic worth still depends on its production efficiency, innovation capacity, financial performance, and long-term demand for electric vehicles. Therefore, when the price of a fundamentally strong company dips temporarily, it can actually be an opportunity to accumulate shares at a discount to their true value. Intelligent investors focus on buying value, not price.
The market may misprice a company in the short run, but over the long run, value always asserts itself. Practical ways to estimate value Even ordinary investors can estimate the true worth (value) of a company using freely available public information. A simple approach is to review the company’s historical earnings and cash flow trends over three to five years to assess growth stability.
Examining debt levels provides insight into the company’s financial risk. Companies with steady earnings growth, strong cash flows, manageable debt, and a consistent dividend record usually indicate lasting value.
Carefully reviewing annual reports and management commentary can be helpful in understanding the company’s long-term vision. Remember, value investing is about discipline, patience, and confidence in core business, facts and fundamentals, and not mere quick profits.
(The writer is an NISM & CRISIL-certified Wealth Manager and certified in NISM’s Research Analyst module).