Price Is Not Value
The habit of watching a stock's price as though it were the thing itself is commonplace among stock buyers at the Nairobi Securities Exchange (NSE), or any other. The screen refreshes, numbers move. Fortunes appear to rise or fall each day, along with a holder's mood. A stock that cost Ksh. 20 yesterday now costs Ksh. 25, and everyone is over the moon, or it dropped to Ksh. 10. Now, investors are weighing between cutting their losses or hanging on for a rebound. There is no certainty about what to do when navigating the NSE, only about what not to do, and confusing price for value is one of them.
A stock's price is simply what someone is willing to pay for it at a given moment. The price describes the mood of the market, not the worth of the business. Most buyers overlook the concept of business value. Buying a stock is acquisition of a piece of business, and like regular transactions, there is often a mismatch between what you pay and the value of piece acquired. Failure to understand this concept has separated more Kenyans from their money than you can imagine. Consider what happened to Safaricom (SCOM) in August of 2021. The stock touched Ksh. 45.25, its highest price ever. Investors who bought at that level believed they were buying Kenya's most successful company, and they were right. What they failed to realize was that they were paying a price that assumed the company would continue growing at rates it had already begun to slow down from. Within two years, that same stock traded below Ksh. 12. The company had not collapsed, M-Pesa still processed transactions, Kenyans still bought airtime. But the price had been a reflection of optimism, not of value, and when optimism faded, so did the price. This story is not about Safaricom. It is about the nature of markets, and it repeats itself with predictable regularity.
Playing Value Not Price
The distinction between price and value is the most practical insight available to anyone who wishes to invest rather than speculate. Price is what you pay, value is what you get. When you buy a stock, you are not buying a number on a screen. You are buying a fraction of a business, its factories, branches, its inventory, its cash in the bank, its future profits. These things exist whether or not anyone is trading the stock. They can be measured, approximately, by anyone willing to look at the company's accounts. And their worth does not change simply because the market's mood has shifted. A business that earned Ksh. 500 million last year and owns assets worth Ksh. 2 billion does not become more valuable because eager buyers have bid up its stock. Nor does it become worthless because frightened sellers have driven the price down. The earnings are the earnings. The assets are the assets. The price is merely the market's opinion on a given day, and the market's opinion is often wrong.
Opportunity
The opportunity in all this is considerable. If prices always reflected value, there would be no room for the intelligent investor. Stocks would be correctly priced at all times, and returns would be modest and uniform. But prices deviate from value constantly, sometimes by a small amount, sometimes by a great deal. When the prices fall below the value, the buyer gets more than he pays for. When it rises above, he gets less, the game is simply to recognize the difference.
This game is not a matter of predicting the future. It does not require knowing whether interest rates will rise or fall, whether the shilling will strengthen or weaken, or whether the next election will be peaceful. These things matter but they are largely unknowable in advance. What can be known, with reasonable effort, is what a business owns, what it earns, and what a sensible price for those things might be. Tools for this assessment are not secret. The most useful of these tools – and the ones this series covers – was devised by Benjamin Graham, who is rightly considered the father of value investing.
Graham's Insight
Graham's insight was deceptively simple: a stock is worth a certain amount based on the profits the company generates and the assets it holds. If you can calculate that amount, and it is not difficult, you have a benchmark against which to judge any price the market offers. Buy below the benchmark, and you have a bargain. Buy above it, and you are speculating that someone else will pay even more. And speculation is a dangerous game of luck.
I do not mean to suggest that this is easy in practice. It requires patience. It requires the willingness to ignore the crowd, which is uncomfortable. And it requires accepting that the market may disagree with your assessment for months or even years before proving you right. But it does not require genius, or connections, or large sums of money to begin, only the recognition that price and value are different.
The NSE offers, at any given time, companies trading above their value and companies trading below it. Some are obvious – a business losing money with debts exceeding its assets is unlikely to be a bargain at any price. Others require closer examination. But the examination is possible. The numbers are published. The calculations can be done. Off the top of my head, one of the stocks trading at a bargain is KCB at Ksh. 67.25 (at the time of writing this article). The numbers are published. The calculations can be done and the rewards, for those who do the work, are substantial.
In the essays that follow, I will show you how to assess what you are actually buying when you purchase a stock, how to find the two numbers that matter most in determining value, and how to use Graham's formula to set a ceiling on what you should be willing to pay. We will look at examples from the NSE – including some spectacular failures that would have been avoided by anyone who understood the difference between price and value. But all of that builds on the foundation laid here. The market will tell you what a stock costs. It will not tell you what it is worth. That you must determine for yourself. And once you learn to do so, you will never look at a stock price the same way again.
This is the first article in a series on value investing for the Nairobi Securities Exchange. The next article will examine what you are actually buying when you purchase a share of stock.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Investing in securities involves risk, including the possible loss of principal. Past performance does not guarantee future results. Readers should conduct their own research and consult with a qualified financial advisor before making investment decisions.