Price versus Value

Price versus Value

The following is an excerpt from one of Bruce Flatt’s letters to the shareholders. Bruce Flatt is the CEO of Brookfield Asset Management. In it he explains how his team at Brookfield handle the investor problem of weighing the price of an asset against its intrinsic value. By the way in stead of reading and being manipulated by the mainstream media, a good idea is to read what the CEO’s of good companies actually have to say about the businesses they run. You will find the reading far more valuable and insightful.

‘Value investing is, in essence, the arbitrage between “Price” and “Value.” The goal of a value investor is to arbitrage price differentials between the Price put on assets, whether that be in the public or private market, and the Value of those assets. Unlike classic arbitrage, however, value investing is not risk free, and profits are not instantaneous or certain. And while simple to understand, it takes years to develop the discipline, patience and judgment required to successfully implement a value investing strategy.

We are great believers that over the longer term, the Price of a security will equal its Value. However, in the short term, for many reasons, Price often does not equal Value. Investors in the stock market, of course, have a daily mechanism to determine the Price of assets which are quoted. For private investments, the Price is not quoted daily, but is influenced heavily by the supply and demand of capital.

Price is more difficult to ascertain in the private markets – particularly during periods of market volatility, and it can be higher or lower than long-term values. This is usually dependent on the supply and demand of capital, which is in turn influenced by investor attitudes. In robust markets, there is generally more capital than there are assets. This forces the Price higher, even to the point where it exceeds Value. In stressed markets, if a sale is necessary, the Price can be much lower than Value. The 20% post-Brexit mark-downs offered to retail investors in UK property funds for liquidity is an example of this.

Inversely, we are often asked how it is that we are able sell assets above our IFRS values. The answer usually lies in the fact that we only try to sell assets in robust capital environments, catching the window where Price is greater than our view of Value.

In summary, Price is merely a function of the supply and demand characteristics for capital that is looking to be invested in a sector of the market, or in a specific asset or stock. Price is often influenced by topical news of the day, market sentiment, availability of capital, and other factors that may or may not have any relevance to the Value of a specific security.

Value, on the other hand, is the net present value of the future cash flows of a business or asset, based on assumptions for future growth and discounted at the appropriate risk rate for that particular investment strategy. The difficulty in ascertaining Value is that there is no absolute value for anything, so there will always be a wide range of views over an asset’s growth profile and the appropriate discount rate. The experience and discipline we have in determining these factors for real assets is one of the key attributes of our franchise’