Resources

Value Versus Price

By Allen R. Jean
January 27th, 2017

In an effort to maximize investment returns one must be able to both logically and emotionally understand the differences between price and value. While price represents the cost of an product, value represents a products worth.

In our consumer-driven society should you focus on the value of a product or its price? Theoretically when focusing solely on price one ends up with an product that cost less but is also poorly made. Whereas when foucsing on value, you invest more in the cost of a product and expect to be rewarded with a product that is designed to last. For example a $60 per of shoes may only last two-years, equating to $30 per year. While a more expensive pair at $250 may last 10 years, equating to $25 a year. All things equal, the more expensive pair is not only less expensive but presents a better long-term value.

As an investor the question remains the same. Should we foucs on price or value? On the surface the answer is simple. Value. If an investor buys a stock for $45, yet believes it to be valued at $300, she stands to profit greatly if the analysis is correct. Yet what lies beneath the surface is determining the actual worth of a stock.

Individual/Retail Investors largely rely on an emotionally-driven approach to investing. As they tend to rely on media heads that promote certain stocks or newsletters that tout the next Amazon, they are emotionally moved to purchase. Unfortunately, coupling this with a short-time horizon when the stocks don't appreciate as quick as they hope, they tend to buy high and sell low. A more injurious situation for individual/retail investors is the "blind" focus on price. A $10 per share stock is thought to have a better chance of appreciating 10% compared to a stock trading at $100 per share thought to have already run its course.

A peek at Institutional Investors one sees a heavy emphasis on reserach and analysis prior to making an investment decision. Albeit the ebb and flow of their investment choices tend to be aligned with their peers. This is due in part to the necessity of owning and holding businesses that are large enough to avoid disturbances in the market. Additionally the consequences of investing outside the universe of widely-held stocks and underperforming your peers in the short-term (even if possibly outperforming longer-term) is loss of capital at best.

At Reliant Investment Solutions, we measure a companies worth based on research and analysis, unmotivated by our peer's short-term moves. Which allows us to determine a businesses value based on its price. It is our beleif that through superior research and comprehensive analysis we can continually find and invest in businesses that offer value based on their current price and strong growth prospects in relations to their long-term price.

When looking at a stock or for an Investment professional to manage your funds, be sure to understand not only what their approach is reagarding price versus value, but also how they measure their performance in relations to their peers.