There are many ways to create value and it may be due to material factors. For example, the financial performance that a customer receives from the use of your product or service, or the intangibles such as image or equity of the brand. This is when you sell a product to a customer, sell stocks in your company, or even sell a job to a prospective employee. The basics are always the same: sell the value. Do not compete over the price. The distinction between price and value is the most effective investment strategy. The fact that the differences between price and value are not recognized is also the reason why many investors lose their jerseys because companies are often overvalued and undervalued.
Price vs value
The main difference between price and value is that the price is arbitrary and value is fundamental. For example, consider someone selling gold bullion for $15 a piece. The price of these gold bars in this case is $15. It is an arbitrary amount chosen by the seller for reasons known only to them. Despite the fact that these gold bars are $15, their value is much higher.
This happens a lot in the stock market. The examples may not be as visible as gold bars, but they are often quite extreme. You see, the price of a stock is determined by a list of factors that takes years to read. Many of these factors can differ between human characteristics and emotions such as fear and greed. Trying to unravel the correlation between these events and stock prices would turn their heads. All of these things can affect the price of a stock, sometimes to a great extent, but they rarely affect their value.
Leveraging differences between price and value
The distinction between price and value is the most effective investment strategy. The fact that the differences between price and value are not recognized is also the reason why many investors lose money because companies are often overvalued or undervalued. So, how do you find companies that sell for less than their true value? The answer is to rate them against a set of standards that go beyond the company’s current price.
- The first step is to make sure that the company you invest in makes sense to you. If this is the case, you will understand it better, you will do more research and invest more passionately.
- The second step is to choose a company that has a gap. This means that the business is inherent, making it difficult for competitors to reduce and reduce part of their market share. For example, the gap of Coca-Cola is their brand. Anyone can make a soft drink, but there is only one Coca-Cola.
- The third step is to review the management of the business. Companies live and die by the people who run them, and when you invest in a business, you need to make sure that your management is talented and trustworthy.
If the company you want to invest meets all these qualifications, calculate its margin of safety. This is the price at which you can buy stocks, while you are almost certain that you will not lose money and are confident that you will perform well. There are a variety of formulas and calculators that you can use to calculate the safety margin of a business. However, if the price of the deal is less than or equal to the number you come with, they are undervalued and an excellent investment opportunity.