## Price vs. Value

Let’s assume we’ve found a comfortable business. Now how much do we pay for it? What is a comfortable price? Obviously, one that is much lower than how much it’s worth – it’s value. So, we have two variables: Price and Value.

*“Price is what you pay; value is what you get. **Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." *- Warren Buffett.

In the case of socks and stocks, Market Price is a given. It’s what the online broker or the store-owner tells us. In the case of socks, Intrinsic Value and Margin of Safety are also given. Stores usually tell us something is marked down by giving us a definitive discount – say 30% off. They’re telling us that the socks – now selling at $7 – are actually worth $10. The sock shop just hands us that equation on a platter.

Investing is different. Market Price is given. But Value is most certainly not. And if we don’t have an estimate of Value, we don’t know whether we’re buying something at a discounted price. In fact, even with socks, we just take the store’s word for it that the socks were actually worth $10.

And that’s what this long discussion is about – Valuation. I suggest you take this article in doses. I’ve tried to arrange it episodically. But you’re welcome to binge-read the whole thing – brew a fresh pot of coffee.

Valuation: I know - the very word conjures up images of multi-tab spreadsheets and complicated finance-y models. But my intention here is get to the "why" behind valuation and, in the process, simplify the exercise. When we know the “whys” behind things, they tend to stick. Even some of the unavoidable math, then, doesn’t look ominous. But I’ll try to keep the math at a minimum. The good news is: we don’t need complicated math or multi-tab spreadsheets. In investing, more calculations do not equate to better analysis.

*“People calculate too much and think too little”* – Buffett, on Wall Street.

There are 2 overarching messages peppered throughout this discussion. If you get nothing else out of this, I hope you walk away with these:

- Valuation is a subjective exercise. It looks numerical, but the meat of it lies in subjective assumptions behind the numbers.
- It’s better to work with real Cash numbers whenever possible. The less theoretical your valuation is, the smaller the chances are (a) of getting it completely wrong and, consequently (b) losing money.

Unfortunately, we’re going to start with some basic math. But this is possibly the most important equation you will need as an Intelligent Investor. If there is a 3^{rd} realization that you can take away from this discussion, please let it be this:

**Intrinsic Value – Market Price = ****Margin of Safety****.**