Price vs value: what the market gets wrong

Price is what the market will pay for a stock today; value is what the underlying business is actually worth. They sound like the same thing and are quoted in the same dollars, but they are produced by completely different machinery — price by the mood and flows of millions of traders, value by the cash a company will earn over its life. Most of the time the two stay roughly in line; the money in investing is made in the moments they don't. Learning to tell them apart is the single most useful skill a stock investor can build.

What's the difference between a stock's price and its value?

Price is the last number someone paid; value is the worth of the cash the business will hand its owners over time. Price updates every second and reacts to headlines, fear, and forced buying and selling. Value moves far more slowly, because a company's earning power doesn't lurch around the way its share price does. When you buy, you pay the price — but what you own is the value, which is why the gap between them matters so much.

Who is Mr. Market?

He is Benjamin Graham's famous image for the stock market, and he's worth keeping in mind. Imagine a business partner who shows up every day and offers to buy your share or sell you his, at a new price each time — sometimes sensible, sometimes wildly optimistic, sometimes despairing. His job is to serve you, not to instruct you: you're free to ignore him on the ordinary days and only act when his mood hands you a genuinely silly number. The investor who lets Mr. Market's daily quote set their own sense of value has surrendered the one advantage they had.

Why does the gap between price and value appear?

Because prices are driven by emotion and mechanics that have nothing to do with a company's cash. Fear and greed push crowds to sell good businesses cheaply and pay up for exciting ones; index flows, forced selling, and short-term thinking do the rest. The pattern I look for is a business where the narrative broke before the numbers did — where the story turned grim while the cash kept arriving. That is exactly when price and value separate, and it's the setup behind the positions I actually hold.

When is a low price not a bargain?

When the value is falling faster than the price. A cheap stock can be cheap for an excellent reason — a business genuinely in decline, its cash draining away — and buying it is a value trap, not a bargain. The test is never the price tag alone; it's whether the cash behind it is intact, which is why I anchor on free cash flow rather than on how far a stock has fallen. Every position in the live portfolio is that question answered with real money — whether the market's fear about a cheap, out-of-favour business is justified by its cash, or whether the cash says otherwise. Which of those calls drove the returns, stock by stock, is public too.