valuation
Price is what you pay, value is what you get
The rule
Price and value are two different numbers. The whole game is telling them apart. The screen only ever shows you the price.
Where it flips
You cannot work out value down to the exact rupee, and pretending you can is its own trap. The point is a rough sense of worth set against a precise price. Not false sharpness dressed up as a valuation.
Buffett's plainest line: price is what you pay, and value is what you get. The two are not the same. A share is a small piece of a real business. Yet the exchange shows only its price, what someone will pay right now. Market cap is that price times the number of shares. It is still a price, not a measure of what the business is worth. For a beginner the rule is easy to say and hard to hold. A rising price is not proof of rising worth. And an IPO priced high is not the same as a business truly worth that much.
A worked example
Two identical shops each earn ₹10 lakh a year. One's price says the shop is worth ₹1 crore. The other's price says ₹4 crore, because it is fashionable. Same value delivered. Wildly different price paid. [illustrative]
How to spot it
- ·price and worth spoken of as separate things
- ·market cap read as a price, not a value
- ·no belief that a higher price means a better business
Warren Buffett · Berkshire Hathaway shareholder letters