An Enduring Investment Truth
Why the stock price paid and the value gained transcend every market cycle
Summary:
In the enduring wisdom of super-investor Warren Buffett, “Price is what you pay; value is what you get.”
This investment truth was evident throughout Buffett’s illustrious career and may endure forever.
Plus, Quality Value Investing’s favorite words of investing wisdom.
Practicing Benjamin Graham’s superior investing paradigm.
Value matters in every area of our financial lives, including the stock market. An investment truth that endures through each market cycle for decades, perhaps forever. This post further explores the virtues of value investing, precisely why the stock price paid and the value gained transcend every market cycle.
Graham and Buffett’s Time-Tested Wisdom
Value investing is an investment paradigm based on the ideas taught by Benjamin Graham and David Dodd at Columbia Business School beginning in 1928 and later published in the 1934 textbook Security Analysis.1 Although value investing has taken many forms since its inception, as a rule, it involves buying securities that appear underpriced from fundamental analysis.
Ben Graham taught me that "Price is what you pay; value is what you get." Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.2
—Warren Buffett, Chairman and CEO, Berkshire Hathaway (BRK.B)
Today, quality-driven value investors commit to Graham and Buffett’s time-tested wisdom that price is what we pay today, and value is what we get over time. Despite any compelling fundamental research on the targeted company and its industry, let price drive our final decision to buy shares or pass for now.
Finding quality operators in any market is challenging. Uncovering such companies at bargain prices in a bull market is the equivalent of finding the proverbial needle in a haystack. Price is what we pay for ownership slices of high-quality businesses. Value is what we gain over time from purchasing stocks only when available at a discount.
Price and value are paramount to matching or exceeding the stock market’s historical average annualized returns from those occasional market pops of big gain days or quarters that underwrite the positive long-term total returns from capital invested and income earned. Yes, there are intermittent bad days or weeks. However, the long-term average annualized gains suggest the good days outnumber the bad ones.
Favorite Words of Value Investing Wisdom
A quote often attributed to Charlie Munger, Vice Chairman at Berkshire Hathaway, puts the subject matter of this post—and quality-driven value investing—in perspective:
Time in the market offers more opportunities than trying to time the market.
Timing the market by chasing trends and fads is for fast money traders and speculators. Time in the market, enjoying the compounding total returns protected by wide safety margins, is reserved for patient and disciplined investors.
It is often reported that over 80 percent of the total shares of common stock owned by Americans belong to institutional investors, including the wealthiest 10 percent of households. Ever the optimists, that leaves almost 20 percent of common stock equity for the rest of us to own and profit from the magic of compounding. Learn to invest in slices of companies instead of trading stocks or chasing fast money fads.
Before the coronavirus pandemic, Bitcoin was taxiing for its subsequent fall from grace. Before that were subprime mortgaged back securities, zero-revenue dot-com IPOs, junk bonds, and land deals in the western United States. Perhaps I am missing a few other fast money schemes that fell between yesterday’s barren land, the post-Great Recession bull market’s cryptonite, the unfortunate 2020-21 pandemic, and the inflation-induced 2022 bear market led by profitless tech companies.
From an investment standpoint, there are just a few market timers in each event who got in with a lucky twist of fate or the rare intuitive sense of market conditions, profited, and got out. Those are the ones who dominate the financial news feeds and sponsored content, giving a false appearance of bullishness or bearishness in the market fad among the masses of well-intentioned investors.
The sobering truth reminds us that money-making headliners represent a tiny percentage of active participants. Too many players in the fad lose money and, echoing the typical casino gambler, share only the rare winning bets. This is just another reminder that market fads make money for a lucky few at the zero-sum expense of the silent investor majority that loses out from the desperate hope to create a lifetime of capital gains in a single market cycle.
The list of household names who made fortunes beating the market by owning investments with utility over extended periods is lengthy. Yet, off the top of my head, I cannot name a celebrity investor who adds wealth year after year, trading in and out of fast money and market-timing fads.
Because price is what you pay, and value is what you get.
Disclosure: I/we have a beneficial long position through the direct ownership of BRK.B common shares in our family portfolio. I wrote this post myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this post.
Benjamin Graham and David L. Dodd, Security Analysis, Sixth Edition (New York: McGraw-Hill, 2009, 1934).
Warren E. Buffett, Berkshire Hathaway, Inc., 2008 Letter to Shareholders, February 27, 2009, 5.
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