Friday's Market Minute: "Price Is What You Pay; Value Is What You Get"

It should be clear to everyone by now that short squeezes are not based on company fundamentals. Rather, they are driven by human behavior and technical factors. Given that human behavior never changes, it is reasonable to assume market participants experience similar emotions at the various parts of the parabolic upswing cycle and commensurate retracement. The price movement we witnessed in GameStop Corp. GME is the most dramatic short squeeze I have seen in 20 years. Short squeezes typically do not last long, and they end when a violent reversal day breaks the upward momentum.

One of my favorite quotes from Warren Buffett, arguably the world's most famous value investor: "Price is what you pay; value is what you get." Both price and value are the two sides of the same coin, and understanding the difference between price and value is the core principle of investing. There are different modeling methods analysts can use to find the absolute value of a company, such as dividend discount, discounted cash flow, income, and asset-based models.

Another method, that can be considered a little dangerous, is perceived value. Here, the value of an object or stock depends on what people assign to it in mind. Perceived value is used a lot in growth stocks, where the company is growing at a fast pace compared to its competitors and industry. This is why risk-prone investors are ready to pay a high price for growth stocks like Tesla Inc TSLA, but a value investor would pass it up.

Many a time, perceived values of a company are influenced a lot by market news, social hype, or other catalysts. Based on how the market price for GameStop and a handful of stocks has normalized this week, one might say that if the underlying company value remains the same, it does not make much sense to overpay. Whether you pay a high or low price for a company, the underlying value does not change.

Photo by Simon on Unsplash

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