Why does value matter?

Price is what you pay, value is what you get. 

Warren Buffett

Price is a noisy distraction and often confused with value.  When we base a decision to invest around a good understanding of value, the outcomes are far more certain, and in some cases inevitable.  If we know what something is worth today and we can be fairly certain about the future earnings, we can develop a pretty good understanding of how much we can expect to collect at some point in the future.  The quoted price, or the bid price, is more useful as a signal for when someone is willing to do something stupid than as an indicator of value. 

Price to book measures the price we pay for a dollar of assets.  The price to earnings ratio measures the price we pay for a dollar of profit.  There are many different ways to measure value and we know it is an imprecise exercise.  Some have referred to the determination of value as resembling a neighborhood rather than an address.  The term relative value is often used to contrast the value of one asset or a group of assets with another.  Intrinsic value is the pure unadulterated truth, the true value.

When value is not well understood, or in the absence of value, a successful outcome will depend on chance.  Most people focus on the price with no appreciable understanding of the value and as speculators, they reap the mixed bag they are sowing.  The fees paid to our professional managers are for their skill in understanding the value of what we own.  The correct understanding of value is paramount to the safety of capital and the single greatest factor in creating highly probable and repeatable success as investors.

When systemic shocks rock the system, we want the confidence that comes from knowing that what we own is a good store of value.