Lesson 1 of 12 · 2 min · Valuation
Price is what you pay
A share is a slice of a business. Its price is only half the story.
A share is a small slice of a real business. If a company has a million shares and you own one, you own one millionth of everything it has and earns.
Meet Lemon Co, a made up lemonade company. We will value it together through this whole path. It has 1 million shares, and each one costs $30.
That $30 is what the market asks for today. On its own it tells you nothing about whether Lemon Co is cheap or expensive.
To find out, you compare the price with what the business earns, owns and owes. Every lesson in this path is one way of making that comparison.
Warren Buffett put it in one line. Price is what you pay. Value is what you get.
Quick question
A stock falls from $50 to $30. What do you know for sure?
- It is cheap now
- It costs less than before, which is not the same as cheap
- The business got worse
Show the answer
It costs less than before, which is not the same as cheap
A lower price is only cheap if the business is still worth more than that. You have to look at the business to know.
Keep this one
Price is what you pay. Value is what you get.
Where this comes from
Warren Buffett, letter to Berkshire Hathaway shareholders, 2008. Lemon Co is invented for teaching, so its numbers stay simple and never go out of date.