Price Vs Value. Too many people know the price of everything but the value of nothing. What is the difference? Why does it matter to you?
Price is mostly public, everything has a price tag, and it is the same for everyone.
Value is private, it is in our heads and thoughts. It is emotional and sentimental. It is not the same for everyone.
Let me illustrate Price vs. Value in a transaction – “Free lunch"
They say that there is no such thing as a free lunch, but there is no shortage of free lunch invitations. Why?
The price tag for lunch may be “zero” but the value is unknown.
Do you know the value of your time? Was it a fair exchange of value? The value of your time may be far greater than the monetary price savings of a free lunch.
It is impossible to get something for nothing.
'Price is what you pay; value is what you get. Whether we’re talking about socks or stocks ” – Warren Buffet
Warren calculates an intrinsic value for everything in life and financial investments. He patiently waits on the sidelines for the price to fall below his privately calculated value, and when it does, he pounces on the opportunity with all his financial might.
Too many people let the price dictate the value underpinned by fear of missing out instead of the other way around.
Morgan Housel creatively modified Buffet’s quote to make a point - “Price is what you pay, value is what you want Excel to say”.
Therefore, It is essential to understand both price and value.
Impact of Price Vs. Value interconnectedness in a portfolio setting.
We assemble diverse parts with different strengths to deliver a whole value greater than the sum of the parts.
The value is the upside potential and the price is the downside probability. But If an individual part is likely to diminish overall returns, it is not worth the price despite the strength.
What do you think?
That is it for today, see you next time.
Postscript: A thought experiment, assume Elon Musk’s Nueralink chip makes private value public, how will that impact pricing?
If the retailer knows you are thirsty through the implanted chip, the retailer might increase the price 10x, the value of a bottle of water at that time for you is infinite and it is priceless but is it fair? who decides?
The Evolution Price Vs. Value discussion is likely to be wild and unpredictable in a “Homo Deus” era in the not-too-distant future.
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