There is an important difference between the price paid for a business enterprise and the intrinsic value of that enterprise. As Benjamin Graham said, “Price is what you pay; value is what you get.” Warren Buffett has made himself and many others wealthy by understanding this difference and making investments accordingly.
Part I of today’s column looks briefly at the intrinsic value versus the market price (sometimes the latter is referred to as market value or market cap) of a publicly traded corporation. Part II looks at current design of long-term incentives awarded to the management of such corporations. These awards tend to be tied to short-term increase in the market price of the corporation’s stock. Part III suggests a way in which long-term incentive awards might be tied more to generators of long-term value of the corporations awarding them.
Value Versus Price
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