On Price Quantity and Value
When I go grocery shopping, I have to deal with two things. One of them is Quantity. Another one of them is price. When economists talk about GDP, they have to deal with quantity and price. When rich people buy or sell gold, they have to know the quantity and price of gold. When investors buy stocks, they have to know the number of shares and the share price. In general, there is a fixed relationship between price, quantity, and value.
V = P * Q
Where V is value, Q is quantity, and P is price per unit of quantity.
The same equation is applicable in the cases of grocery shopping, GDP calculation, gold trading, and stock investing. However, there are some subtle characteristics about the quantity and price. Today I am going to explore this subtlety.
In the case of grocery shopping, the total quantity of food one family can consume over a specific period, say during a year, can be fairly stable. However, the total cost of the food consumption can vary widely depending one the price of food. The rate of change for the total quantity of food can be much smaller than the rate of change of price over the same period of time.
In the case of GDP estimation, since the total quantity of domestic products is impossible to determine accurately. So the Gross Domestic Product is usually just a total value number. Price change is determined independently. The change of quantity of domestic products is smaller than the change of price. So the economists call this extra-change in price as inflation.
In the case of gold trading, the total quantity of gold in the world changes less than 2% on an annual basis while the change of gold price can be as high as 100% per year. Gold price gyration over the past several years is an excellent example of the price change.
In trading stocks, the total outstanding shares of a company changes very little every year while the price movements of many stocks usually over 100% every year. One can almost find some stocks with daily price change over 50%.
From the above example, I can easily conclude that the price change over time is much faster than the quantity change over the same time. If this assumption is indeed true, then one can make some further conclusions.
Since the real values of grocery, gross domestic products, gold, and stocks are associated with quantity only, any extra-change in price will never last a very long time. The extra-change will reverse toward it real value. Investment gurus such as Warren Buffett call this real value as intrinsic value for stocks. Since the intrinsic value for any company would not change as rapidly as its stock price, so the over-price or under-price of stocks will reverse to its intrinsic value eventually.
Since the real value or intrinsic value is much less volatile than the price movements, one can win continuously if he can spot the differentials between the price and value. This is why investors always stress that one has to buy low and sell high.
V = P * Q
Where V is value, Q is quantity, and P is price per unit of quantity.
The same equation is applicable in the cases of grocery shopping, GDP calculation, gold trading, and stock investing. However, there are some subtle characteristics about the quantity and price. Today I am going to explore this subtlety.
In the case of grocery shopping, the total quantity of food one family can consume over a specific period, say during a year, can be fairly stable. However, the total cost of the food consumption can vary widely depending one the price of food. The rate of change for the total quantity of food can be much smaller than the rate of change of price over the same period of time.
In the case of GDP estimation, since the total quantity of domestic products is impossible to determine accurately. So the Gross Domestic Product is usually just a total value number. Price change is determined independently. The change of quantity of domestic products is smaller than the change of price. So the economists call this extra-change in price as inflation.
In the case of gold trading, the total quantity of gold in the world changes less than 2% on an annual basis while the change of gold price can be as high as 100% per year. Gold price gyration over the past several years is an excellent example of the price change.
In trading stocks, the total outstanding shares of a company changes very little every year while the price movements of many stocks usually over 100% every year. One can almost find some stocks with daily price change over 50%.
From the above example, I can easily conclude that the price change over time is much faster than the quantity change over the same time. If this assumption is indeed true, then one can make some further conclusions.
Since the real values of grocery, gross domestic products, gold, and stocks are associated with quantity only, any extra-change in price will never last a very long time. The extra-change will reverse toward it real value. Investment gurus such as Warren Buffett call this real value as intrinsic value for stocks. Since the intrinsic value for any company would not change as rapidly as its stock price, so the over-price or under-price of stocks will reverse to its intrinsic value eventually.
Since the real value or intrinsic value is much less volatile than the price movements, one can win continuously if he can spot the differentials between the price and value. This is why investors always stress that one has to buy low and sell high.
posted by Unknown at 8:04 PM
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