Value and price are two different numbers
The quote on the screen is what one seller wants today. What the business is worth is a separate question with a separate answer — and the whole method lives in the gap between them.
What you'll take away
- Price is set by the last trade. Value is set by the cash the business can produce for its owners.
- A falling price is information about the market, not automatically information about the business.
- You never need the exact value. You need to know whether the price is clearly below it.
Two numbers, one ticker
Open any quote page and you get one number in large type. It updates every few seconds, it is the number in every headline, and it is the number most people mean when they say what a company is "worth". It is not that.
The price is what someone was willing to pay a moment ago. The value is what the business will hand its owners over the years you hold it.
Those two things are related — over a long enough stretch they tend to meet — but they are produced by completely different machinery. The price comes out of an auction. The value comes out of operations: customers, margins, reinvestment, cash. An auction can be influenced by a redemption at a large fund, a sector downgrade, an index rebalance, or nothing at all. None of those events touch what the factory produced this quarter.
The price is somebody else’s opinion
It helps to make the auction concrete. Imagine you own a quarter of a profitable local business, and every morning a neighbour knocks and shouts a price he will pay for your quarter. Some mornings he is cheerful and shouts a high number. Some mornings he has read something frightening and shouts a low one. He never looks at the books.
You are not obliged to answer. The only thing his shouting gives you is an option: sell to him at his number, buy more from him at his number, or do nothing. He is a service, not a judge. A public market is that neighbour with better plumbing — faster, larger, and available to you rather than binding on you.
Where value actually comes from
Strip away the market and a share is a claim on a stream of cash. That is the entire asset. Its value is the cash it will produce for you, adjusted for how long you have to wait and how sure you are that it arrives.
value ≈ (cash the business can distribute) adjusted for (time) and (certainty)
Every valuation model on this site is a different way of filling in those three brackets.
Written that way, two things stop being mysterious. First, why durability matters so much: a cash stream you can describe ten years out is worth estimating, and one you cannot is a guess dressed as a number. Second, why quality and price are separate tests. A business can be excellent and still be a poor purchase, because the two brackets that decide value are not the brackets that decide what you pay.
Why a gap opens at all
If value is knowable, why does price ever stray far from it? Because the people setting the price are answering a different question on a different clock.
- Horizon. A fund judged on this quarter cannot hold a position that will be right in three years. Selling is rational for them and tells you nothing about three years.
- Size. Large capital needs liquidity. A business that is too small to absorb a position is not priced by the people with the most analysts.
- Bad news with a known shape. A lawsuit, a recall, a lost contract: the market prices the headline immediately and the resolution slowly, because the headline is easy to read and the resolution takes work.
- Boredom. Nothing happened for four years, so coverage thinned out and nobody re-derived the number.
Notice what every item on that list has in common: it is a constraint on the seller, not a fact about the company. That is the only kind of discount worth buying. A price that is low because earnings are permanently lower is not a discount; it is an accurate price you have misread.
What this changes about your decision
The practical shift is small and it is the whole thing: you stop asking "is this going up?" and start asking two questions in order.
- Can I describe this business ten years out — what it sells, why customers stay, roughly what it earns? If not, stop here. No price is low enough to fix an unknowable cash stream.
- Is today’s price clearly below my estimate of value — not slightly, clearly? If it is only slightly below, your estimate is not precise enough to tell the difference.
The second question is why this site never reports one fair value. Three models are run side by side, and the number that matters is the one you would be comfortable paying if all three were wrong in the same direction. That buffer has a name and a chapter of its own.
Worked examples use invented figures to make the arithmetic visible. Moatrics covers US-listed companies.
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