Saturday 10 March 2012

Price is not value, pricing is not valuation, and pricing models are not valuation models.

A valuation model is an effective method for estimating economic value.


Another term that is used to refer to economic value is "fundamental value", which derives the quantity of value from so-called fundamental economic metrics generated by a firm at the firm-level, in contrast to pricing metrics generated by a securities market at the security-level. 


Price is not value, pricing is not valuation, and pricing models are not valuation models. 


The conventional academic capital asset pricing model has one factor, the beta coefficient. 

  • Models that include beta are pricing models, not valuation models. 
  • This is not merely a matter of semantics. 
The difference between price and value, referred to as the margin of safety, is the raison d'etre of investment valuation independent of market pricing.


http://www.numeraire.com/value.htm

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