In Security Analysis by Graham and Dodd, 1934 edition on page 23: "The Relationship of Intrinsic Value to Market Price.--The general question of the relation of intrinsic value to the market quotation may be made clearer by the appended chart [see table below], which traces the various steps culminating in market price.
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It will be evident from the chart that the influence of what we call analytical factors over the market price is both partial and indirect--
- partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and
- indirect, because it acts through the intermediary of people's sentiments and decisions.
Relationship of Intrinsic Value Factors to Market Price | ||||
I.General market factors | } Attitude of public toward the issue (leads to) } Bids and offers (lead to) } Market price | |||
II.Individual factors | A.Speculative | 1.Market factors | a.Technical | |
b.Manipulative | ||||
c.Psychological | ||||
A.Speculative B.Investment | 2.Future value factors | a.Management and reputation | ||
b.Competitive conditions and prospects | ||||
c.Possible and probably changes in volume, price, and costs | ||||
B.Investment | 3.Intrinsic value | a.Earnings | ||
b.Dividends | ||||
c.Assets | ||||
d.Capital structure | ||||
e.Terms of the issue | ||||
f.Others |
The radical difference between value and price is explained by John Burr Williams in The Theory of Investment Value as indicated in the following quotations: (1938: 33):
- "If opinion were not founded in part on current dividends and changes therein, there would be nothing to prevent price and value from drifting miles apart." (1938: 191):
- "Since market price depends on popular opinion, and since the public is more emotional than logical, it is foolish to expect a relentless convergence of market price toward investment value. Corroboration of estimates [of intrinsic economic value] by subsequent market action, therefore, ought not to be expected. After all, investment value and market price are two quite different things."
Thus:
Price is not value. Pricing is not valuation. Pricing models are not valuation models. Pricing models include: capital asset pricing model (CAPM), arbitrage pricing theory (APT), and option pricing. |
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