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With investing, price is what you pay for the asset. Value, however, is what that asset is actually worth. There is a crucial difference. Asset prices are determined by popularity in an auction process – the “voting machine” in Warren Buffett speak. With the stock market, when demand for a company’s shares is higher than supply, buyers are forced to pay up. And vice versa.
I learnt this first-hand during a memorable 12 months from mid-1999. That was the dawn of the Internet Age and investors lined up for anything with Dot.Com attached. Investment bankers listed my two-year-old (seriously) online publishing business for free – provided they got the right to “place” some of its shares with their favourite clients (and themselves).
The pre-listing roadshow to institutional investors sharing my best guess on the company’s future, drew way more demand than shares available. On listing, the share price was double its IPO level. After January 2000’s Dot Com crash, those same shares flooded the stock market, offered at a tenth of the price owners desperately bought at six months earlier.
Price and value. That’s the foundation of all stock market investing. Not understanding this simple fact is a reason many smart people are poor investors. Including one of the past century’s great minds, economist John Maynard Keynes, who said, “Markets can stay irrational longer than you can stay solvent.” Remember this and you may just beat the odds.
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