"Price is what you pay, value is what you get."

Arguably, Warren Buffett is the finest living investor. He believes in only purchasing a small handful of select shares and applying, "A buy and hold strategy."

"Price is what you pay, value is what you get."

This Buffett quote could be one of our most important investment lessons.

He refers to three types of value:-

Price And Value:

Both price and value are the two sides of the same coin.

Understanding the difference between price and value is the core principle of value investing.

The quality is the same. The only thing that changed is the amount of money you need to pay for it. Same value at a higher price.

Three types of value that you should know:

Whether you are purchasing a product or coins, there are three types of valuing things:

• Relative value
• Absolute value
• Perceived value

Let’s discuss each value type one-by-one.

1. Relative value:
Relative value is the valuing of how much the product is worth by comparing it with its competitors.

Similarly, while performing a relative valuation of coins, do not compare just two products, try and consider the industry average.

2. Absolute value:
This is a pretty straightforward method of valuation. Absolute value aims to find how much the product is truly worth by considering its intrinsic features.

If the product is known, you can easily find out whether it is under or overvalued.

If the coin is trading at a market value below its intrinsic value, then it is undervalued or cheap. On the other hand, if the market value is above its intrinsic value, then the company is overvalued or expensive.

Once a coin is known, you can easily find out whether it is under or overvalued.

If the product is trading at a market value below its intrinsic value, then it is undervalued or cheap. On the other hand, if the market value is above its intrinsic value, then the product is overvalued or expensive.

3. Perceived Value:
This is the third valuation method and can be considered a little dangerous. Here, the value of the object depends on what the people assign to it in mind.

The perceived value is completely unrelated to the absolute value.

For example, the value of a collector's coin totally depends on how much you will perceive it in your mind.

It totally depends on the perception of the buyer.

The most common example of perceived value:

The price of coins you can see in your day to day life.

Although you can quote a price for your coin, however, the selling price will totally depend on the perception of the buyer. You might convince people to pay a higher price, however, the bargain depends on how much the buyer wants to pay.

Despite having the same quality, different people will quote a different price for your price.

Overall, the perceived value of the coin will be the price that the person will be willing to pay.

Coin prices reflect perception.

The coin market also works on the perceived value.

Moreover, many a time, these perceived values of the product are influenced a lot by the analyst’s recommendations and the market news.

As the underlying product remains the same, it doesn’t make much sense to overpay.

Whether you pay high or low for the product, the value won’t change.

Summary

There are three types of value that every investor should know:

Relative value: It is the valuing of how much the product is worth by comparing it with its competitors.

Absolute Value: The product is value based on its intrinsic features.

Perceived Value: It depends on the value assigned by the buyer in his mind.

Moreover, the coin price reflects perception. Here, the price and value are different and most of the time unrelated to the coin market.

This is true only for the short run. Over a long period of time, the price will approach the value. That’s why if you purchased a coin when it was overvalued and have the patience to hold it for a long duration, then it certainly will reach its true value in future and give you good returns.