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Understanding value

  • #1
  • First Post: Jul 3, 2014 5:07pm Jul 3, 2014 5:07pm
Price is a simple thing to define: it is an objective value determined by the forces of supply and demand. If I asked you what the price of a certain security was, a simple Google search would give you the answer. Value, however, refers to how much something is actually worth - a much more complex thing to understand.
Is value an objective figure? Given every possible variable relating to the production/scarcity/uses/etc of an item - would it be theoretically possible to work out what it is worth?

Given every relevant piece of information about the US and global economy, would it be possible to objectively calculate the value of a dollar at a given point in time?
  • #2
  • Jul 3, 2014 7:16pm Jul 3, 2014 7:16pm
Quoting Ponzi Jr
Price is a simple thing to define: it is an objective value determined by the forces of supply and demand. If I asked you what the price of a certain security was, a simple Google search would give you the answer. Value, however, refers to how much something is actually worth - a much more complex thing to understand. Is value an objective figure?
Value is an opinion, therefore not objective i.e. it is subjective. Opinions don't put food on the table. Price is objective; it's something everybody sees and something everybody has no choice but to agree on.

Quoting Ponzi Jr
Given every possible variable relating to the production/scarcity/uses/etc of an item - would it be theoretically possible to work out what it is worth?
Probably, but only to the eye of the beholder. What's valuable to one person may be of less value to others.

Quoting Ponzi Jr
Given every relevant piece of information about the US and global economy, would it be possible to objectively calculate the value of a dollar at a given point in time?
Subjective to you, sure you can calculate value. Objectively however, no.

You can make your own calculation of "value". Someone somewhere out there may disagree with your conclusion and/or disagree with the methodology you used to arrive at it.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #3
  • Jul 3, 2014 8:32pm Jul 3, 2014 8:32pm
Quoting grin
{quote} Then: price = value = opinion :nerd:
Not necessarily does price = value. And by "price", this means current price.

A buyer may buy a commodity at a particular price point, but if the buyer hopes to re-sell it later at a higher price (in the future), then clearly the buyer "values" that commodity at that (yet-to-be-seen) higher price i.e. the buyer's opinion is that the commodity "should" be at that higher price, which at the moment has not occurred yet.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #4
  • Jul 4, 2014 1:38am Jul 4, 2014 1:38am
Quoting Ponzi Jr
Given every relevant piece of information about the US and global economy, would it be possible to objectively calculate the value of a dollar at a given point in time?
No because as pointed out above value is subjective (value is in the eye of the beholder). But even if you could, you couldn't monetise it as far as trading goes, since your calculation of value would likely have little to do with what is actually driving the market at any given point in time. It would be better imo to think of value as whatever price the market is trading at after all the participants have positioned themselves accordingly with their concerns/interests.
  • #5
  • Jul 4, 2014 2:08am Jul 4, 2014 2:08am
Let's say that Value = price
Price without commitment means nothing.
By this I mean that value only has meaning in terms of the money-at-risk

Winning trade = good value
Losing trade = bad value
  • #6
  • Jul 4, 2014 3:09am Jul 4, 2014 3:09am
What would you choose as more valuable between a bottle of water and a gold bar?
What if you were dying in the sun of a desert?

The price is always different from the value. I read somewhere "A transaction is an agreement on the price and a disagreement on the value". It means the buyer values more what he buys than his money while the seller values more the money than the good he's selling.
No greed. No fear. Just maths.
  • #7
  • Jul 4, 2014 3:34am Jul 4, 2014 3:34am
"Value is an opinion, therefore not objective i.e. it is subjective. Opinions don't put food on the table. Price is objective; it's something everybody sees and something everybody has no choice but to agree on."


It's not true. You can define the value by looking for the price of control.

POC = Point of Control
Price at which the most TPO’s occur in the Market Profile chart
during the previous day. The prices that saw the most activity. Visually the
longest horizontal line.


You can have an idea of the value on a given period. (daily, hourly, weekly, monthly, etc.)

A Trading range means that market participants have just found the value. They neutralize each other by buying/selling.

A TREND is ONLY a divergence between the PRICE and the VALUE.

OP : You're right. You have to ask yoursefl where is the value? Winning traders focus on value, loosing traders focus on price.
  • #8
  • Edited 5:31am Jul 4, 2014 5:00am | Edited 5:31am
Quoting Unabletrader
"Value is an opinion, therefore not objective i.e. it is subjective. Opinions don't put food on the table. Price is objective; it's something everybody sees and something everybody has no choice but to agree on." It's not true. You can define the value by looking for the price of control. POC = Point of Control Price at which the most TPO’s occur in the Market Profile chart during the previous day. The prices that saw the most activity. Visually the longest horizontal line....
I think it's important to focus on both price and value. To me it seems that price and value may move independently of one another in the short run, but should be somehow correlated in the long run. I mean, couldn't one argue that what happens when a market bubble forms, is that price and value deviate from one another significantly enough for market participants to notice the difference? I'm sure there must be a way of explaining price action as a series of small market bubbles - created by deviation of price and value over time?

EDIT: Sorry, I didn't read your post properly - you mentioned divergence of price and value already! It seems that were on the same page with this one!
  • #9
  • Jul 4, 2014 5:11am Jul 4, 2014 5:11am
Quoting PipMeUp
"A transaction is an agreement on the price and a disagreement on the value".
I like that quote very much. In the context of speculative purchases, it makes perfect sense. However, would you agree that it was true for the purchase of goods for personal consumption? I mean, if you bought a bag of carrots at the supermarket, you're likely not buying them because you believe that they are undervalued.
  • #10
  • Jul 4, 2014 5:16am Jul 4, 2014 5:16am
Quoting skenobi
{quote} Value is an opinion, therefore not objective i.e. it is subjective. Opinions don't put food on the table. Price is objective; it's something everybody sees and something everybody has no choice but to agree on. {quote} Probably, but only to the eye of the beholder. What's valuable to one person may be of less value to others. {quote} Subjective to you, sure you can calculate value. Objectively however, no. You can make your own calculation of "value". Someone somewhere out there may disagree with your conclusion and/or disagree with the...
Alternatively, do you think it's (theoretically) possible to objectively calculate changes in value based on changing variables? If not, do you think that there are any objective attributes of value? Would you be confident in saying that 1kg of sand is not worth $10,000?
  • #11
  • Jul 4, 2014 5:34am Jul 4, 2014 5:34am
Quoting Ponzi Jr
{quote} I like that quote very much. In the context of speculative purchases, it makes perfect sense. However, would you agree that it was true for the purchase of goods for personal consumption? I mean, if you bought a bag of carrots at the supermarket, you're likely not buying them because you believe that they are undervalued.
Yes in the sense that I would consider feeding my family worths more than the few bucks I'll spend for the carrots.
If you buy a car that's because you need/want this car more than keeping the money it costs... and so no

I leave to the philosopher the paradox that driving a Ferrari values more the showing you have money than the money itself yet you have to spend (=no more have) the money you want to show you have...
No greed. No fear. Just maths.
  • #12
  • Jul 4, 2014 5:35am Jul 4, 2014 5:35am
Quoting Ponzi Jr
{quote} I think it's important to focus on both price and value. To me it seems that price and value may move independently of one another in the short run, but should be somehow correlated in the long run. I mean, couldn't one argue that what happens when a market bubble forms, is that price and value deviate from one another significantly enough for market participants to notice the difference? I'm sure there must be a way of explaining price action as a series of small market bubbles - created by deviation of price and value over time? EDIT:...
A trend is a price which diverges of the value. It means that markets participants are looking for a new value.

When price is in sideways it means that Traders have found the value.

It's true for any timeframe. Short term or long term.
  • #13
  • Jul 4, 2014 5:44am Jul 4, 2014 5:44am
Quoting PipMeUp
{quote} Yes in the sense that I would consider feeding my family worths more than the few bucks I'll spend for the carrots. If you buy a car that's because you need/want this car more than keeping the money it costs... and so no I leave to the philosopher the paradox that driving a Ferrari values more the showing you have money than the money itself yet you have to spend (=no more have) the money you want to show you have...
Just out of interest, who was it that said "A transaction is an agreement on the price and a disagreement on the value"?
  • #14
  • Jul 4, 2014 6:13am Jul 4, 2014 6:13am
Quote
If not, do you think that there are any objective attributes of value? Would you be confident in saying that 1kg of sand is not worth $10,000?
I would say yes because everybody knows one can buy sand for far less even if we don't know where and for how much. But if you find someones who knows it is sand and is ready to buy it that amount how could I argue the deal isn't fair?

Beside its electrical properties what is the use of gold? This material worths nothing. It's not even edible!
What the objective value of a broken brick? Yet some people paid to get pieces of the Berlin Wall.
What is the value of Mona Lisa? It is just a bunch of paint plastered on a piece of cloth. Let's say $20.

If you have the monopoly on something you can price it independently of it value, whatever this value may be.
SNB decided that the price of EUR/CHF can't be less than 1.20. They don't want the price to reflect the value (value = value the speculators think it is).

PS: I don't remember in which of the numerous books I read I found this quote but I liked it.
No greed. No fear. Just maths.
  • #15
  • Jul 4, 2014 6:38am Jul 4, 2014 6:38am
Quoting PipMeUp
{quote} I would say yes because everybody knows one can buy sand for far less even if we don't know where and for how much. But if you find someones who knows it is sand and is ready to buy it that amount how could I argue the deal isn't fair? Beside its electrical properties what is the use of gold? This material worths nothing. It's not even edible! What the objective value of a broken brick? Yet some people paid to get pieces of the Berlin Wall. What is the value of Mona Lisa? It is just a bunch of paint plastered on a piece of cloth. Let's say...
Your gold analogy is a solid one (and pointing out that it's "not even edible" did crack me up). Still, consideration of production costs may help to derive some hint at it's value? If you knew that the price of a security would never breach a certain level in the long run, would it not be fair to say that it is worth at least that much? Do the laws of supply and demand not dictate that gold prices could never (realistically) fall below production costs in the long run?

Alternatively, what about value investing in equity markets? Do you believe that it is realistically possible to scour through a companies financial statements to calculate an estimate of the firms value? If so, would it not be theoretically possible to calculate a exact, objective figure given perfect knowledge and perfect understanding?

Sorry if I'm starting to sound like a stuck record on this one, but I do feel like my understanding is benefiting from this discussion.
  • #16
  • Jul 4, 2014 7:43am Jul 4, 2014 7:43am
These are good questions.

Quote
Does the consideration of production costs may help to derive some hint at the value of gold?
Perhaps it is the other way around. Considering the current price of gold you can derive a maximal value for the cost you are ready to invest for mining it. If a lot of people were ready to buy sand $10000 a kilogram you would be willing to sell as much as you can produce even if you know it is way overpriced. Other people will do the same and the competition will drive the price down. If your competitors are smart enough they won't lower the price too much so everybody keeps the high margin, independently of any objective value. Some of the oil reserves in the world are too costly to be exploited today. Does it increase the value of oil? I think it actually lowers it because knowing there are some more makes it less rare.

---------

If you can perfectly estimate the price a stock should be it doesn't mean the other people realize the mis-pricing. Until this awareness price won't increase and you won't profit.
No greed. No fear. Just maths.
  • #17
  • Jul 4, 2014 7:54am Jul 4, 2014 7:54am
Anyway we are traders even when we are deeply convinced the price is way too high for the value we keep going long as long as the price is going up.
No greed. No fear. Just maths.
  • #18
  • Jul 4, 2014 8:18am Jul 4, 2014 8:18am
I like to think about pit trading floors, where we have many people screaming and making gestures.

What happen in detail, trader "A" want to buy, he look at the screens, and see that the current price is 150,50.
He decide to try to buy 5 contracts at 150.40.

At this point, he scream and make gestures to let anybody know that he want to buy 5 contracts at 150.40.

Trader "B" see him, and he want to sell 5 contracts at 150.40, so he say "OK", filled.

They both write about their trade in their paper (trader "A" write he bought at 150.40 from trader "B", and trader "B" write he sold to trader "A" at 150.40), this will be later given to the "house" and used then for logging-checking purposes, anyway...

While trade "A" and "B" made their trade, there was various guys all around near them, the work of these guys is to see trades taking place, and immediately send such information (price of the trade, volume of the trade) to the electronic Worldwide market, with their funny wireless ipad style device.

So, immediately after trader "A" and "B" made their trade with their voice and hands, the market price will move to 150.40, signaling that as the last price.

So i would say the value/price of something is continuously decided by people that sells and buy it, if two guys agree to buy/sell something at a particular price, that will be the value of such thing on that particular moment, pretty simple though.
  • #19
  • Jul 4, 2014 9:39am Jul 4, 2014 9:39am
Quoting spaceduck
So i would say the value/price of something is continuously decided by people that sells and buy it, if two guys agree to buy/sell something at a particular price, that will be the value of such thing on that particular moment, pretty simple though.
But what if traders "C" and "D" shake their hands at the same time for 150.45?
What is the value when we are not even sure of the price? Isn't it exactly what happens with FX market?
No greed. No fear. Just maths.
  • #20
  • Jul 4, 2014 10:34am Jul 4, 2014 10:34am
Quoting PipMeUp
{quote} But what if traders "C" and "D" shake their hands at the same time for 150.45? What is the value when we are not even sure of the price? Isn't it exactly what happens with FX market?
I guess, the market price would be something like this:

150.50
150.40
150.45

(or)

15050
150.45
150.40

You get it, the same thing happen on the fx market, and in all decentralized ones (so far we can say all markets are in some way decentralized).
It's really a mess when thousands if not millions of traders are trading the same thing from all around the world in the same time, that's why on an interbanking-institutional level the speed of informations is extremely important, there are huge powerful trans-atlantic optical fiber cables connecting all the world stock-exchanges and trading-hubs for the purpose of sharing all the trades and the various prices in realtime within the network, so we can see the price moving on our charts, all magically synchronized (no matter if you live in australia or usa, all the brokers show almost the same price in the same time for everybody).
I would say this is a real technological success!
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