One of Warren Buffett’s most famous quotes (echoing Benjamin Graham) is “Price is what you pay; value is what you get.” For most people it’s difficult to separate a company’s stock’s price from what it is worth. Investors often forget that a stock price simply represents the price that someone is currently willing to pay to purchase shares in a company—and many times, that price is not a reflection of a company’s underlying value.
This concept is especially important now as there are many companies that have recently lost 30% to 70% of their value. This significant “price reduction” does not automatically spell a bargain, as companies whose share prices have collapsed could have just been grossly overvalued to begin with. What’s more, they may still be overvalued. To be successful, investors should focus on what a company is worth and pay less attention to short-term share price movements.
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