Don't Confuse Price for Value

Philip Fisher was a great investor. Despite his focus on growth, he was well aware that the more you pay the less you keep, and hence the smaller your returns will be. Fisher also warned his readers that price and value are not equal and that just because a stock's price has been stable for a long time does not mean that a) it's correct nor b) that it can't change when events change or the market's mood swings.

Here's a paragraph from his book Common Stocks and Uncommon Profits that I find extremely important and possibly one of the main "hidden" lessons in the book:

When for a long period of time a particular stock has been selling in a certain price range, say from a low of 38 to a high of 43, there is an almost irresistible tendency to attribute true value to this price level. Consequently, when, after the financial community has become thoroughly accustomed to this being the "value" of the stock, the appraisal changes and the stock, say, sinks to 24, all sorts of buyers who should know better rush in to buy. They jump to the conclusion that the stock must now be cheap. Yet if the fundamentals are bad enough, it may still be very high at 24. Conversely, as such stock rises to, say, 50 or 60 or 70, the urge to sell and take a profit now that the stock is "high" becomes irresistible to many people. Giving in to this urge can be very costly.

Fisher goes on to explain that fortunes are made when stocks are let go many times higher than what the investor paid for the stock, precisely because he bought them when they were undervalued or fairly valued and growing. He also added:

The only true test of whether a stock is "cheap" or "high" is not its current price in relation to some former price, no matter how accustomed we may have become to that former price, but whether the company's fundamentals are significantly more or less favorable than the current financial-community appraisal of that stock.

This rings true with value investors and growth investors as an investor is he or she who makes intelligent decisions about investments, and does not speculate on market events that have no bearing on the true value of a company.

The danger of getting too hooked up on price is so high that Fisher introduced its "influence" as follows:

This influence is one of the most subtle and dangerous in the entire field of investment and one against which even the most sophisticated investors must constantly be on guard.

Know the value of what you own.

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