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[Fin Talk] Understanding Value and Price
By Arlyn Tan
The context of value and price can be seen from the lens of investor and entrepreneur. Value investing will allow investors to stay in the course when the market is down, and to shy away from stock buying when prices are too high for its value. On one hand, entrepreneurs can use branding initiatives to enhance the perceived value to create better profit margins.
It is vital to have an appreciation of value because it will help you make wiser decisions and reap higher rewards.
When you purchase an asset like property or a share of stock of a listed company, do you spend time checking the value beyond the price? Investors associate price with value. Many think that an expensive piece of land reflects its value.
According to Warren Buffett, “Price is what you pay. Value is what you get.”
The drivers of price are supply and demand. As more people are willing to buy a share of a stock, the higher the price goes. When there is scarcity of land, the prices of land in that area goes up. On one hand, when there are assets that are unloved or dumped because of news, the prices dive down significantly even if they are valuable.
The prices of stocks can be driven by greed and fear, market events which are directly and indirectly correlated to the company’s fundamentals. An example of a market event was when China published the reforms which will alter the model of the private companies teaching the school curriculum, it caused panic selling. This news drove the prices of big techs, online brokerages, and auto companies from China down causing at least $1trillion from February to July 27 2021.
The five metrics to measure the value of the company include price to earning ratio, debt to equity ratio, PEG ratio, Price to Book Ratio, Free Cash Flow, and the Bottom Line. According to Aswasth Damodaran , author of the Dark Side of Valuation, the value of a company is driven by growth potential, risk parameters and the reinvestment of capital. He emphasizes that the usual focus on growth rates in revenues need to be replaced with a focus on the reinvestment rate to deliver the growth rate.
To the eyes of the investors, leveraging the difference between the price and value is the key to profitability. Buying a company that is on sale means you are paying a low price with an intrinsic value. When one understands the value of the company, he can hold on to his stocks even if the prices go down. Despite the many noises, he can wait until the price appreciates before selling.
Budding entrepreneurs may resort to low price strategy when they bring products and services to the markets. However, the value-based pricing is recommended. The perceived value of consumers would be reflected in their willingness to buy the products and services at a premium price.
Companies which have brand leadership can also drive prices up. Real estate developers like Ayala Properties can leverage their brand of building communities to price the condo units higher than their peers. Ayala is able to differentiate itself from competition through the way they handle customer queries, the customer journey from acquisition to turn-over of units.
The investor, entrepreneur and consumer who can distinguish the big difference of values will be the real winner. You don’t need to worry about sell-off, price competition and your budget respectively. Let us do our assignment. Stay Calm while prices fluctuate. Stay wise will you choose the products with high value but low price.
Arlyn Tan is a Strategic Wealth Consultant. She helps individuals and organizations on how to maximize the value of their money through risk, health & wealth management. Her mission lies in making sure that clients achieve 3 things. First, they reach their milestones on time with sufficient resources. Second, they protect them from the impact of economic losses secondary to unexpected events. The third and most important is that they enjoy meaningful and balanced lives.
LinkedIn/Twitter: Arlyn Tan