VALUE INVESTING
What is Value (Revisited)?

By Stephen Bland (TMFPyad)
October 5, 2001

I used the same title for an article back in February of this year, hence the revisted. At a time when we at the Motley Fool UK have had to make a round of redundancies it makes me wonder what the value of shares or other things, people even, really means. An interesting debate arises around the worth of people. Is a nurse or teacher worth a tiny fraction of a football star? The relative incomes of these suggest that this is indeed the case. The market says so and the market is never wrong is it?

In the earlier article of this title I showed a dictionary definition of value as "the worth of something compared to the price paid or asked for it." This seemed to me a good way of putting it. In another article back in February 2000 regarding breaking the link in your mind between the cost of a share and its current price, I commented that value in shares is represented by the price someone is prepared to pay in an open market at that moment, whatever the investor thinks the shares might be worth. These two definitions could be seen as contradicting each other.

What I mean is that it does not matter what I think a share might be worth, all I can ever get for it is what the market is prepared to offer. Reality is only the current price, value, what I see in the share, is perception, illusory, and will become reality only if the market decides to rerate the share to agree with my perception. This is why I dislike terms like "real" or "intrinsic" value used by some writers about shares. These words suggest that the current price is the illusion and the "real" price should be something different. There is no real value, no intrinsic value. There is only the current price which is changing constantly. Obviously a value investor, any investor long a share, hopes the price will rise but it is just that, hope. But you can't get hope for your shares when you sell, you can get only the market price.

They don't always go up, even value shares will prove bad investments sometimes, so where is the "real" value then? The answer is that it was never there, reality was an illusion if the investor ever believed that the real value was much higher than the price paid for the shares. Obviously it would have been bought on the perception that it would rise due to observation of the fundamentals and other reasons. But all these factors ever amount to is a faith, a belief that the price will rise. Faith and belief are not reality. Money is reality. Someone is prepared to give a you a given sum of money at a given moment for your shares. You can't bargain, you can't ask for more because you believe it is worth more, it is take it or leave it.

Paradoxically perhaps, experienced value investors, fundamental style, rarely use words like real or intrinsic. If anything these should be the investors who do use such expressions because we attempt to make money out of shares that are "undervalued." But we know that the concept of undervalue is based only upon our belief that it is so. It may be a very strong belief, in my case it amounts almost to religious fervour, but also like religion, it is not a fact, not until the price rises to prove us right and we discover that god actually does exist.

Consequently I am suspicious of commentators that use words like "real value" when suggesting shares in which to invest. They are not likely to be too successful in my opinion and they are not likely to be value investors. No doubt there may be exceptions as with all generalities, but anyone who thinks that a share ever has a "real value", with all the certainty implied in those words, as distinct from a mere "belief value" cannot have too much experience in the fickle stockmarket.

All just words I guess but beginners especially, at whom most of what I write is aimed, can be mislead by those using words like "real" or "intrinsic" when such just does not exist with shares in my opinion. So if you ever see such words used when reading about share suggestions be very careful. The shares may not be so attractive as the writer is indicating.