Remember those MasterCard commercials?

We can learn a lot about investing in stocks from these MasterCard commercials by examining more deeply the contrast between price and value as depicted in the advertisements.

Let’s examine some observations and beliefs about price-
An example:
-price of an iPhone 12: $1,000
-price of oxygen we breath: $0
Which has more value to us?
Another example:
-price of a new Honda Civic: $25,000
-price of your child’s life: ??? (Obviously priceless)
Yet another example:
-price of a gallon of gasoline: $2.75
-price of transporting yourself and your stuff the 20 miles a Honda Civic would take you on one gallon of gasoline: ??? (A lot more than $2.75)

We can see clearly from the examples (exaggerated as they may be) above that price is not determined by value. In some cases, the two are not even remotely related. 

Warren Buffet likes to say that price is what you pay, value is what you get. When we use price as a measuring stick for value, we are showing our representative bias: our tendency to believe that one thing does in fact represent what it claims to*. But when we examine price in relation to value, we can conclude that price often fails to represent the relative value of the thing being priced.

In investing, we ascribe a great deal of meaning to the price of stocks. The price of a stock is what we focus on. The price of a stock is how we measure our wealth. The price of a stock is how we determine the relative performance of one company versus another. The price is what receives all the attention of investors, and yet, the price in some cases tells us nothing of the value of the object being priced.

I like to take this observation to the extreme. What if price not only tells us little about the value of the object being priced, but in fact there is an inverse relationship to the price and its inherent value?
Let’s look to several examples:
-price of annual salary for LeBron James: $39,000,000
-price of annual salary for trash collector: $38,000
Which job is more valuable to the functioning of society?
Another example:
-price of a Coke: $1.75
-price of a glass of filtered tap water: $0.50
Which option has more value?
And yet another example:
-price of a share of $TSLA: $700
-price of a share of $HMC: $30
We can site many examples of two contrasting objects where the cheaper priced option is of far greater value.

Admittedly, it is not practical for everyday living or successful investing to hold the view that the more expensive option is of less value. There are many examples where a more valuable option is the more expensive option**. However, this view is useful for developing a contrarian mindset that is essential for measuring value.

Value investing requires the investor to take a contrarian view that the price is lying about the value of the stock in question. This view is not easy to hold when highly priced stocks you assess to have low value keep going up in price, and lowly priced stocks you asses to have high value keep going down in price as is often the case.

Much of the time you see a price going down on a stock you asses to be high value, it is the price that is telling the truth and your assessment that is wrong. However, the inverse is usually not true, and often times far more painful for the investor.

A stock that goes up in price that you deem to have low value will most of the time keep going up in price. It generally will keep going up after that. And it just keeps going. In this case, your assessment of the low value may not be wrong. That is the more painful experience of being wrong. There is no resolution to this as there is in the case of assessing value too high to a low priced stock. In these cases of wrongly assessing a high value, events unfold that reveal the mistake in your assessment of value. In the case of wrongly assessing too low a value, many times events unfold to prove your assessment correct, and yet price keeps going up.

We would never expect that LeBron James’s salary to level out with that of a trash collector relative to their respective indispensability to society. Similarly, we should not expect the price of any stock to level out with its respective value to the economy. In fact, we should not expect the price of a stock to tell us very much at all about anything related to objective reality. That is what makes investing fun- realizing that at its core, investing is just a game. The winner correctly identifies stocks whose price, not value, is going up for any reason or no reason at all. It is scarcity and demand at a point in time that determine price, not value. It is a belief that a value should have a high price. If this belief were universally true, oxygen would be the most expensively priced commodity in the world at all times.

*(This bias is what, in part, contributes to our belief in brands: a logo represents some desirable quality such as social status, craftsman ship, etc. The brand’s logo may very well represent such qualities in fact, but sometimes may not. Sometimes, it is merely our belief in such brands).
**(A high quality, tailored apparel item vs. a cheaply manufactured one for instance).