Crypto Circle Summary on Value - Warnings from Whale Cryptocurrency Exchanges

Many people often mention value investing,

and also discuss what exactly the “value” in value investing means.

In fact, in different scenarios,

the meaning of the word “value” can vary.

Value is a very general term,

and it is also a word that is often misused.

Just like the commonly used word “system,”

in business, computer science, or engineering,

the meaning of “system” can be completely different.

Today, I will explain the precise meaning of “value” in value investing through this program,

to help beginners clear up some confusion.

First,

I want to talk about “use value.”

Use value refers to the usefulness of certain goods or things.

But high use value

does not necessarily mean they have more commercial value.

For example, air and water,

we cannot live without air at all times,

and we need water daily,

so air and water have very high use value.

Although air and water have high use value,

their prices are not high,

air and water are basically free in our daily life.

There are also some goods with very high prices,

but we may not necessarily need them.

For example, LV bags,

a bag bought for 5 yuan and an LV bag have no difference in use value.

Back in the day, Karl Marx said,

that prices fluctuate around value,

I don’t know what kind of “value” this German professor was talking about,

if he was referring to use value,

it’s obvious he lacked basic common sense for living.

From these two examples,

we can see that the use value of goods is not necessarily related to their commercial value.

Next is the so-called “social value,”

a product produced by an industry or enterprise has high social value,

but it doesn’t necessarily have high commercial value.

For example, food and other agricultural products,

they have high social value,

people must eat,

everyone needs food,

but agricultural products don’t make much money,

otherwise,

farmers wouldn’t need to go to the city to work and earn money.

There are also industries like steel,

cement, etc.,

their products are in great demand for railways,

highways,

and housing,

but the commercial value of steel,

cement, and similar goods is not high.

Companies in these industries,

whether in the US or China, create a lot of wealth for society,

although their scale is large and social value is high,

it’s hard for them to make money,

which shows that their commercial value is also not high,

so their stock prices are not high either.

Everyone should think independently,

and be clear about use value and social value,

not to confuse them.

Let me give another counterexample,

such as the tobacco and alcohol industry,

especially cigarettes,

which are very harmful to health,

causing many people to develop lung cancer.

From the perspective of social value,

the social value of the tobacco and alcohol industry is even negative.

In China,

the tobacco industry is very profitable,

making a lot of money through monopoly and exploiting human nature,

it has very high commercial value.

This is also the main reason why no cigarette company is listed in China.

The above is an introduction to social value,

social value is not necessarily related to commercial value.

Commercial value,

simply put, is the ability to make money.

As investors,

we are all interested in the commercial value of a company,

unfortunately,

there are different ways to measure commercial value.

For example, the market considers a company’s commercial value,

simply put, it is how much the market thinks the company is worth,

which is reflected in the market capitalization.

In China, the largest company by market cap is Kweichow Moutai,

apart from some luxury attributes,

and its slightly better taste compared to other white spirits,

its use value and social value are not much different.

Its use value cannot be compared to air and water,

and its social value cannot be compared to agricultural products.

But Moutai’s commercial value is very high,

which reflects its market cap of trillions of yuan.

From this, we can see that

a company’s commercial value can be reflected through its market cap.

Another is what is called “book value” in accounting,

which appears on the company’s balance sheet.

A company’s total assets minus its liabilities

are called net assets or book value.

But these are only meaningful in accounting,

and do not necessarily represent the real worth of the company.

Some assets are worth much less than their book value,

such as goodwill, which actually has little value.

But some assets may appear to be worth ten million,

while their actual value could be over a hundred million.

For example, a property bought for ten million in Shanghai,

after real estate prices rise,

its actual value might now exceed one hundred million.

So these so-called book values are only relevant in accounting,

and may differ greatly from actual value,

and cannot be used as a measure of a company’s worth.

The banking and insurance industries are more suitable for using book value,

because their book values are reflected in cash or cash equivalents.

Other industries’ tangible assets can differ greatly from their book values.

Some assets can also be very valuable,

such as a company’s corporate culture,

management capability,

intangible competitive advantages,

brand, etc.,

which are not reflected on the balance sheet,

and when valuing a company, we also need to consider these factors.

Finally, there is the “intrinsic value,”

intrinsic value refers to how much money a company can earn in the future.

The valuation we often talk about

is estimating the company’s intrinsic value.

Intrinsic value is not the market price,

because when the market is optimistic, the price is higher,

and when pessimistic, the price is lower.

As mentioned earlier, book value also cannot reflect the true intrinsic value of a company.

Intrinsic value can only be obtained through valuation,

and when valuing a company, we cannot rely on a single formula,

because each industry,

each company’s growth stage is different,

so there is a lot of knowledge involved in valuation.

If there were a universal formula

to evaluate a company’s intrinsic value,

then valuation would be effortless,

everyone would imitate it,

and competition would become fierce,

making such a formula invalid and meaningless.

I have also mentioned before,

any tool with a very low entry barrier

won’t be very effective,

not because the tool itself is problematic,

but because too many people use it,

ultimately causing the tool to lose its effectiveness.

Many people ask me how to estimate a company’s intrinsic value, asking very detailed questions,

but in fact, it is of little use,

each company is different,

there is no fixed formula,

what I can provide is only a rough outline or a clue,

and only through your own thorough digestion and understanding

can you apply it flexibly.

Although some indicators like the P/E ratio,

and return on equity can be used as references,

when using these indicators,

you must understand their limitations.

Because this program discusses the summary of value,

not valuation,

so I won’t go into detail here.

In the above, we discussed market value,

book value, and intrinsic value.

Market value reflects the market’s perception of a company’s commercial value.

Book value measures a company’s worth using accounting methods.

Intrinsic value reflects the company’s true worth through valuation.

Unlike market value and book value, intrinsic value is not immediately obvious.

Intrinsic value varies from person to person,

different people have different opinions,

including Buffett and Munger,

who have been partners for over fifty years,

but they still have different views on each company’s intrinsic value.

So there is no universal formula,

to clarify again.

Earlier, I talked about use value,

social value,

and commercial value of goods,

and finally, I will discuss “investment value.”

In value investing, “value” refers to investment value.

After we estimate the company’s intrinsic value,

and recognize it as a good company,

if the company’s price exceeds its intrinsic value,

it is not a good investment for investors.

Simply put,

you need to know the company’s intrinsic value,

and compare it with the market’s valuation (price),

to see if they match.

If there is no difference,

don’t invest in it.

Value investing is about whether there is investment value.

For example, Tencent Holdings,

is a very valuable company,

but its price might also be quite high.

If the price and intrinsic value are aligned,

you can buy or choose not to buy,

because even if you buy, the return might not be very high.

Maybe Tencent can earn 20-30% annually,

but because the price paid is too high,

it might prepay future earnings.

The same applies to Moutai,

which currently has high profit margins,

and its P/E ratio is already around 60-70.

Although Moutai is a great company,

it doesn’t necessarily mean it’s a great investment.

So, you must look at the price versus intrinsic value,

only when the price is below the intrinsic value,

does the company have investment value.

Don’t fall into the misconception

that a good company must be an investment.

When a good company’s price drops to a certain discount,

with some margin of safety,

it can be acceptable,

because good companies rarely see large discounts.

But if you pay too high a price,

it’s equivalent to overdrawing future returns.

For example, if you buy a company

with a return on equity of only 15%,

it means it can generate 15% profit annually.

But as an investor,

if you buy at too high a price,

your annual return might only be 5%.

Because you paid too much,

and the P/E ratio is high,

which indicates how many years it takes to recover your investment.

I won’t repeat the discussion on P/E ratio and ROE here,

interested readers can review previous content.

In value investing, “value” refers to investment value,

which means the price must be below the intrinsic value

to have investment worth.

So,

investing involves a game of probability,

we all hope for the market to give us a discount opportunity.

For example, Moutai,

from a business perspective,

has a return on equity of 25%,

because you buy at a cheap price,

your annual earnings could be 35%.

To illustrate,

the market offers you a chance to buy Moutai at 100 yuan,

instead of over 1,000 yuan now,

even though Moutai earns 25%,

since you buy at a discount,

your annual gains will be higher.

It’s like a restaurant,

which can earn 25% annually,

normally priced at 1 million,

but you buy it at a 50% discount,

then your annual earnings are not 25%,

but 50%.

To find low prices,

we need to leverage the market,

patiently wait for the market to offer a discount,

and buy when the price is below intrinsic value,

to gain good investment returns.

Simply put,

the lower the price compared to the company’s intrinsic value,

the higher the investment value.

Another key point is that in the market,

we want to earn both from the market and from the company’s operations.

Preferably choose high-quality companies with stable long-term profits,

poor companies, no matter how cheap, are not suitable.

For example, companies like Moutai can continue to generate profits.

Buying at a low price is one aspect,

but also ensuring that the company is a high-quality enterprise.

If you discover the value of this company,

and others haven’t,

that is the best.

Of course, everyone can see Moutai’s value,

its value has been fully recognized.

There are also some companies,

whose value many people do not know,

appearing to have high P/E ratios,

but these companies are just in a high-growth stage,

and may become more profitable in the future,

with costs decreasing over time.

So, we need to find such valuable companies,

and most importantly, the company must be able to make money long-term.

Stock selection is also very important,

don’t simply think that value investing is just buying cheap stocks,

value investing is actually a two-variable function,

one is price,

the other is the company’s intrinsic value.

Price is very important in investing,

try to buy as cheaply as possible,

and the other is to choose high-quality companies.

Therefore,

the investment value in value investing is the margin of safety,

a concept I mentioned in other programs,

referring to the difference between price and intrinsic value.

In simple terms,

you want to earn from both the company’s operations

and the market,

which means the market undervalues the company,

buying at a discount,

with a margin of safety.

By estimating the company’s intrinsic value,

we assess its true worth,

but this does not mean the company can be invested in,

the most important thing is whether the company has investment value.

Whether a company has investment value,

depends on whether there is a discount between its price and intrinsic value,

only when there is a discount,

does it have investment value.

To get a relatively low price,

you need patience,

waiting for the market to give you an opportunity to buy quality companies,

so you can profit from market fluctuations

and also benefit from the company’s growth.

This is what is meant by the investment value in value investing.

We need to overcome human nature,

and patiently wait for good companies to be available for purchase.

Some may think Moutai’s price is very high,

and there is little chance for a discount,

but I want to say that good companies do have fewer discount opportunities,

but the market will definitely give you a chance to buy,

it might be late,

but it will come.

Everyone must be patient,

if not,

you will end up being a “leek” in the market.

If you buy at too high a price,

even if you invest in a good company,

it might not be a good investment,

and many people suffer losses because of this.

The reason good companies’ prices stay high is because many blindly follow,

we must distinguish between a good investment and a good company.

We need to deeply understand the concept of investment value in value investing,

which is the margin of safety,

and not just focus on low price.

If you buy poor-quality companies just because they are cheap,

you will fall into a value trap,

even if you buy cheap now,

it might be even cheaper in the future,

and poor-quality companies may go bankrupt.

Therefore,

we must study the company,

analyze its operational status,

and not just focus on stock prices,

which is why investing is a game of cognition,

and a game of human nature.