Home' Trinidad and Tobago Guardian : May 25th 2017 Contents "The stock market is filled with individuals
who know the price of everything, but the value
Value, price and worth are
terms that have been topical
issues recently. People have
been trying to apply these
concepts to properties, to
companies and to share pric-
es in order to make sense of information that
is in the public domain.
The problem for many is that there is a
layman interpretation of these concepts and
a professional interpretation. With the advent
of social media anyone can become an expert
in everything leading to much misinformation
In everyday language, price is how much you
paid for something. It is used interchangeably
with cost where the cost of the product is the
amount for the item viewed from the per-
spective of the buyer. In determining whether
you should pay the price or incur the cost you
typically rationalise in your mind how much
something is worth and whether there is value
in the item being purchased.
These three concepts---price, value and
worth---are not the same but because we use
them interchangeably as though they mean the
same thing we often confuse ourselves.
An item can be on sale in which case its price
is $100. The quality of workmanship may be
such that the item is worth $150 but how you
actually intend to use the item could save you
money in other places so much so that the value
of the item to you is $300.
Most people looking on at a transaction from
the outside will primarily focus on price but the
only way to properly understand a transaction
is to get a sense of worth and value, especially
from the perspective of the buyer.
It was Warren Buffet who famously said
"price is what you pay, value is what you get."
Clearly there is a fundamental difference be-
tween the two concepts.
Spot the difference
The technical understanding of price is that
it is a function of the market dynamic. It is
essentially what you can sell an item for or how
much someone with similar information to you
is willing to purchase the item. This is why
proper disclosure of information is essential
in establishing price.
The process through which information is
disseminated and assimilated in the market
is a process known as price discovery. So, in
the case of property, a registry of the price at
which properties of a similar type and location
changed hands allows for price discovery as
others have access to these past transaction in
order to inform their current situation.
The same occurs with stocks where the
quoted price provides a reference point for
new bids and offers. Unless there is signif-
icant new information coming to hand, the
stock will usually change hands very close to
the quoted price.
Before you get to price you have to grapple
with the concept of worth and value.
How many of you would want to own a Vene-
zuela or Iraq Government bond? I don't expect
anyone to answer yes to this question. However,
in a bond portfolio where 99 per cent is invest-
ed in US Government bonds (US Treasuries)
bonds from those two troubled nations may
actually be worth something to the portfolio.
The value of the bonds in question may be
highly speculative but there may be worth to
a portfolio in the sense that for a 99 per cent
holding of US treasuries the risk of loss if held
to maturity is likely zero but the return will also
be low. It may well be worth it to some investor
to just put one per cent of the portfolio into a
very high risk bond with the hope that it can
boost the portfolio return if the investment
Understanding the concept of worth is fun-
damental to understanding a transaction and
investing on the whole.
Art of the deal
Take, for example, Apple or Amazon.
Both companies have seen their stock prices
rise significantly over the past few months. A
price increase based on trading means that a
transaction has taken place involving a buyer
and a seller. So, ask yourself who would want
to sell Apple at US$120 when the price is now
US$145 just a few weeks later? Same for the
person selling Amazon at US$800 a few weeks
ago when today the stock price is US$970.
Transactions of this nature happen every day
and while it may be hard to rationalise we don't
conclude that the transaction is corrupt be-
cause it is nonsensical to think that way. A sale
happens because the seller having a reason to
sell finds a buyer with a reason to buy. Specific
to the concept of worth the seller of Apple stock
may have owned the stock at US$80 and with
a 50 per cent gain in hand their investment
policy may have mandated that they sell.
The buyer focusing on the growth potential
of Apple would have been willing to add this
stock to their portfolio even though the stock
is up 50 per cent over a relatively short period
It all comes down to the role that the Apple
stock played and will play in the respective
portfolios. How it fits in with other stocks that
may exist alongside. A company may seek to
divest of a subsidiary for a similar reason in
that the company in question no longer has a
role to play in their portfolio of offerings and
that same company may be acquired due to
the fact that the service on offer may be of
value to the acquirer.
The concept of worth in finance suggests
that someone will only sell an asset when its
worth in the market exceeds its value to the
owner. It therefore means that while price
is the end result and worth may provide the
motivation. it is value that is the underlying
incentive for the transaction.
If you own Apple shares at a price of US$120
but you think that it is worth no more than
US$100 then you will be motivated to sell. The
buyer on the other hand requires a different
incentive. The buyer has to be convinced that
the Apple stock has a value significantly more
than US$120. The buyer may be anticipating
that roll out of the new iPhone 8, the intro-
duction of new products and an increase in
profitability. That may result in the buyer
placing a valuation of US$200 on the stock.
It is not unusual for a seller to think that a
stock is worth US$100 but the buyer ascribing
a value of US$200 and be willing to commit to
a price of US$120. The same information avail-
able to both sides but different results based
on unique perspectives. This is, in fact, what
makes a market.
This process is not something to be criticized
or condemned but rather one that you should
take the time to understand. All of us engage in
this process many times in our life. You have a
car to sell, you think it is worth $100,000 but
you call a price of $130,000 and eventually
you get it sold for $120,000. You walk away
The buyer, on the other hand, is looking to
purchase your private car, the only car that
you own and is seeking to add it to a fleet of
other vehicles that the buyer already owns
from which the buyer expects to generate a
return of $250,000 over the next two years.
The buyer may think a deal would be worth it
at $150,000 and, in those circumstances, also
walked away feeling satisfied at a having paid
a price of $120,000.
How many times have you had an experience
such as this either as a buyer or a seller during
It may be a car, a house, selling a company,
a stock. The fact is that it happens everyday.
Your participation either as buyer or seller may
not make sense to a bystander because they
don't see the worth or the value that you see
and therefore can't agree on a price.
This is such a fundamental part of everyday
transactions most people engage in the pro-
cess without thinking. However, when faced
with a similar situation while looking on from
the outside they are often quick to find fault.
It is usually down to not taking the time to
understand the deal.
Ian Narine is an investment adviser registered
with the SEC and can be contacted at ian.
BG16 | FINANCE
BUSINESS GUARDIAN guardian.co.tt MAY 25 • 2017
Know the difference
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