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Bargain and Signal | Price vs Value

First rule of value investing is to look at stocks as pieces of businesses that you can own. I buy into this philosophy as it makes the most sense to me. I focus on two things when I take position in stocks: underlying value of the business and the price I am paying. While the price is obvious, the underlying value is an enigma. 

Nobody can figure out the true value of a stock. Most investors try to gauge future cash flows from a business and discount them at a  rate to derive the value of the business. This process seems a good practice but has a lot of fault lines. 

Nobody can predict the future cash flows. The best you can do is to have a reasonable expectation but what is reasonable is always debatable. 

So, what to do? 

One practice to reach a decision is to take conservative assumptions for the business and see whether the value based on conservative assumptions is above or below the price the market is currently assigning. If the price is still below the derived value, you can find some margin of safety from the position in this stock at this price. Margin of safety is another tenet of value investing. While it doesn’t immune you from errors, it increases your odds of success. Investing in stocks is all about that if you are not throwing dirt blindfolded. 

You try to gauge which stock at which price will give you the higher probability of increasing your wealth. The market sometimes offers a bargain that, if you take, can give you the deal of a lifetime. But the price-too-low can also be a signal that the market expects the business to go downhill from here and the market turns out to be right. 

Is it a bargain or is it a signal? 

You have to decide and keep checking with your prior thesis on the stock with new and updated data. Investment doesn’t end with the purchase of a stock. It’s a journey that I take and keep checking with my thesis of the business to update, reaffirm or discard my prior beliefs. You can't understand a business all at once. You take on the journey and continue to equip yourself with the knowledge of the businesses you invest in and all the things that affect it from whatever sources possible.  

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