The Relationship of Intrinsic Value to Market Price - tracing the various steps culminating in market price.

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. 

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. 

In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.

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.

 http://www.numeraire.com/margin.htm

Activities that emphasize price movements first and underlying values second tend to be self-neutralizing and self-defeating over the years.

Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will “do better” than the rest over a fairly short period in the future. 

Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor—particularly since he would be competing with a large number of stock-market traders and firstclass financial analysts who are trying to do the same thing.

As  in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and selfdefeating over the years.

Peter Lynch: Market Prediction

Market ought to be irrelevant to your investing.
I made money in lousy market and I lose money in good market.

Investing strategy of Peter Lynch
http://multibaggersindia.blogspot.com/2010/11/investing-strategies-from-peter-lynch.html