Beware of stock market's false bargains
One of Warren Buffett’s most famous quotes (echoing Benjamin Graham) is “Price is what you pay; value is what you get.” For most people it’s difficult to separate a company’s stock’s price from what it is worth. Investors often forget that a stock price simply represents the price that someone is currently willing to pay to purchase shares in a company—and many times, that price is not a reflection of a company’s underlying value.
Jonathan Boyar, CEO at Boyar Value Group, states in an article in Forbes that this concept “is especially important now as there are many companies that have recently lost 30% to 70% of their value.”
This significant “price reduction” does not automatically spell a bargain, as companies whose share prices have collapsed could have just been grossly overvalued to begin with. What’s more, they may still be overvalued. To be successful, Boyar argues that investors “should focus on what a company is worth and pay less attention to short-term share price movements.”