Many beginners believe investing success comes from finding good companies.
Experienced investors know the real truth:
Great companies can still be bad investments if bought at the wrong price.
This lesson helps you understand valuation thinking without complex formulas or fear.
Price vs Value – The Core Difference
🏷️ Price
- What the stock market is asking today
- Changes every second
- Influenced by news, emotions, and sentiment
💎 Value
- What the business is actually worth
- Based on earnings power, growth, and sustainability
- Changes slowly over time
📌 Investing is about buying below value, not chasing price.
A Simple Real-Life Analogy
Imagine a mobile phone:
- Market price today: ₹50,000
- Same phone during a festival sale: ₹40,000
The phone didn’t change — only the price did.
📌 Stocks work the same way.
Why Good Businesses Can Be Poor Investments
A company may have:
- Strong brand
- Growing profits
- Excellent management
But if the stock price already assumes very high future growth, returns may be low.
📌 When expectations are too high, disappointment hurts returns.
What Drives Stock Prices in the Short Term
In the short run, prices move due to:
- News and headlines
- Market sentiment
- Fear and greed
- Liquidity and speculation
This is why prices often move without changes in business fundamentals.
What Drives Stock Prices in the Long Term
Over time, stock prices follow:
- Earnings growth
- Cash flow generation
- Return on capital
- Business sustainability
📌 In the long run, business performance matters more than noise.
Introduction to Margin of Safety
Margin of safety means:
Buying a stock at a price significantly below its estimated value.
Why this matters:
- Protects against mistakes
- Reduces downside risk
- Improves long-term returns
📌 Always leave room for error.
Valuation Is a Range, Not a Number
Valuation is not exact.
Instead of asking: ❌ “What is the correct price?”
Ask: ✅ “Is this price reasonable given the business quality?”
Common Beginner Valuation Mistakes
Avoid these traps:
- Buying because price is falling
- Buying because price is rising
- Assuming popular stocks are always safe
- Ignoring valuation during bull markets
📌 Price without value is speculation.
Investor Mindset
✔ Focus on business quality ✔ Be patient for reasonable prices ✔ Avoid emotional decisions ✔ Think in years, not days
You don’t need perfect valuation. You need reasonable price + good business + patience.
Key Takeaways
- Price and value are different
- Great companies can be overvalued
- Margin of safety protects capital
- Valuation thinking reduces emotional investing