Price and Value

The Price of something is what you pay for it. The value of something is what you obtain from it. Price is not necessarily equivalent to value.

In investment the value of an asset is the summation of the future cash flows from the asset discounted at an appropriate rate. What you want to do is pay a much lower price compared to the value you obtain. The difference represents your margin of safety. The bigger the margin of safety the lower the risk of the investment.

You then need to repeat this process with uncorrelated investments. This is the essence of what Benjamin Graham calls value investing. This is a great approach to investing and can reap you huge rewards in the long run.

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