"Price is what you pay. Value is what you get.”
- Warren Buffet

The Concept of Value

James and Robert, two friends. James loves calling his friends over the phone and uses any moment he can to do so. He literally spends several dozen of hours a month on the phone, and suffers subsequent high phone bills. But he loves calling, and the expensive phone bills are worth it to him. Robert thinks this is crazy and more than once stated that he would never pay such a high bill a month, and that James is crazy for spending so much money on phone calls. Robert however, loves going to concerts of famous artists for about the same amount of money a month than James spends on calling.

The example above perfectly illustrates the concept of valuation. James values calling his friends more compared to Robert and is willing to pay a higher price for it. James on the other hand prefers spending his money on pricy concerts because he values them more. The value drivers of both persons are different. This example can be extended to almost anything you can buy. Some goods are more prawn to individual valuation, like for instance houses, are strongly valued by the individual perception of underlying value drivers. James might value a balcony more than Robert, who on his turn would prefer spaciness and a lot of light. Consequently James and Robert will have other price perceptions for same houses. Now multiply James and Robert times many people, and you get an idea of how the free markets function. At every instance, all over the world, people like James and Robert value goods & services, each according to their own background and beliefs, and buy accordingly. This buying creates demand, which on its turn steers prices.

Valuation of goods,
creates demand, which on its turn steers prices of Goods

Valuation of investment assets by individuals, create demand, which on its turn steers prices for investment assets

The market for investment assets works fairly similar. But remember from the previous page that investors seek to put their money at work, instead of consuming it immediately. As a result, the major difference is that when investing, assets are bought with the idea of making value out of it by either re-selling it at a higher value, either earning value with it in terms of recurring payments. As a consequence, investors will value their assets on a constant basis. Their appetite for buying or selling assets will depend on their belief of the future developments of the value of that asset.  

And this is how prices are determined on the financial markets. Imagine millions of investors constantly buying and selling at the price they deem their assets worthy. James sees asset A has reached a price at which Robert deems it good to sell at. Robert sells, James buys. This kind of events happens a gazilion times a day in a fraction of a second, all over the world.

But how do you value investment assets? Unlike what many people believe, there is not one way to value investment instruments. At best, some financial indicators, guidelines or comparisons in the market can give an indication of what the price of an asset should be. And some mainstream strategies or calculations exist. However, one should never forget that valueing -just like in the example of James and Robert- is a social happening and is a combination of many people's interpretations based on personal beliefs, education, culture, etc... As such, markets are subject to human sentiment, are irrational and unpredictable.

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