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Value vs Price – Key difference to know for an investor

In investing, Uncategorized on March 10, 2016 at 10:26 pm

Price is what you pay and value is what you get.

When I was young and studying in Bangalore, tomato price used to fluctuate a lot. During wedding season (Apr-May), price of tomatoes would shoot up from 10 rupees a kilo to 50/100 rupees a kilo. When the price was high, my mother would buy less of it and we would get less of rasam and more of other non-tomato dishes.

A few months later, sometimes tomato price would crash due to a bumper crop. Situation would get so bad for farmers that they would not even recover the cost of transportation and hence throw their produce! Price would crash to less than a rupee a kilo and street hawkers would sell few kilos of tomato for 10 rupees. My mom would then buy tomato in bulk and use it for everything. We would attempt to even try to make *jam* from those tomatoes.

Moral of the story – My mum’s behavior – Buy less when the tomatoes are pricey and more when they are cheap.

Contrast this with what happens in the stock market – people flock to buy stocks when price goes up and dump them when price goes down.

Question to ask is why? Why are stocks different than tomatoes? The answer is difference between value and price.

If you know the value, you buy more when price is less than value.

My mom knew the value of tomato. She understood what it could be used for. Hence the behavior.

What does that tell about the stocks then? If you feel like buying stocks when the price goes up and selling when the price goes down, you don’t know the value. You are just gambling and nothing else! Wake up! Leave the market! and cut your losses!

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