Saturday, September 10, 2011
Price Is What You Pay. Value Is What You Get.
"Price is what you pay. Value is what you get." This is one of the famous Warren Buffett's quote that I like most. In fact, this has become one of my motto whenever I do shopping, be it in the stocks exchange, or in my day to day shopping routine like groceries, buying clothes or investing in transportation mode and expensive gadgets.
Ok. Why do I think this quote relates to the blog until I put it as the Quote of the Day? Well, let just say I just want to remind myself that price is only something that I will need to pay and it is the value that I should look into on something that I wanted to invest, be it stocks or clothes or food or many other more. So, in other words, this quote can apply to almost everything in our daily life.
Let me give an example over here. Hmm....let me see, well, I have few pairs of sport shoes, different brands and price range as well. I usually will get a pair of shoes made locally, price range about RM60-RM70. Here is what value and the lesson of price and value comes about. At the same time, I have few pairs of Nike shoes, price ranging from RM250-RM600. The value I'm talking about is my Nike shoes can last me for years, while the local brand shoes last me about a year. If I'm comparing a pair of RM60 shoes with a pair of RM250 shoes, the more expensive one certainly more comfortable and it last longer than the RM60 one and the fact that the Nike shoes are more durable means that I can save more in the long run. I am not saying that cheap certainly means bad, but just merely a lesson of price and value. Price wise, the Nike shoes seems more expensive, but after comparing overall, the shoes do have the kind of value. The good thing about buying cheaper shoes is that I have every reasons to change it every year, whereas if I just buy "slightly" more expensive shoes, I won't be able to do give myself reason to get new one - also might be way out of budget :p.
Sometimes, cheap can give one more value than the expensive one. It's all depends on one need. Back to the shoes example. Trust me, if there is a budget for it, I will still buy local brand shoes if needed as extra pair so that I will not feel bored wearing the same shoes over and over again. Doing this might prolong the lifespan of the shoes as well giving me time to clean the shoes that I might not be wearing for that whole week. The value here is that the cheaper pair of shoes is used as the buffer while not draining up much cash.
Surely, when Warren Buffett quoted this, he did not mean something so simple as deciding to get a pair of shoes. I like this quote especially when it comes to deciding what price range of the stocks that I would like to buy.
Trust me. I do not believe in investing in cheap stocks although the return could be lucrative say maybe 100% per bit of transaction, but I might buy into penny stocks, if the value is there.
How do I define the value of each stocks then? Is it based on the price? Not actually. I usually prefer to buy stocks within RM1 to RM3 range, because this range is the most affordable to me - simple saying, I prefer to buy middle cap stocks. However, the price alone does not dictate the value of the stock. Stock A might be RM1 but it is already overvalue, while stock B might be priced at RM10, but still undervalue. How I tell whether a stock is overvalue or not, well, I'm not a technical analysis person, so, I just perceive a stock value based on the financial strength and earnings of the company and the nature of the business.
This does not mean all these "undervalue" stocks will surge but at least by screening out based on the financial reports of the stocks, it will reduce the chances of one getting a stocks at high price.....well, overpriced stocks.
I will not talk on some of the criteria that I looked whenever I filter out the stocks selection at this post, but I might be sharing that in the near future. Or maybe sharing out why most of us ended up buying stocks at high price even though the stock is deemed "cheap" finally trapped when the sentiment turn sour.