Quoted market prices are but one opinion of value

— Chris Mayer from “Invest Like a Dealmaker” p. 12

This is not a new idea. A man name John Burr Williams wrote a hefty tome called The Theory of Investment Value back in 1930. In this book, Williams wrote eloquently about stock quotes being merely opinions of value set at the margin. Let’s hear from Williams himself:

Concerning its true worth, every man will cherish his own opinion; as to what price really is right, only time will tell. . . . [T]he market can only be an expression of opinion not a statement of fact. Today’s opinion will mark today’s price; tomorrow’s opinion tomorrow’s price; and seldom if ever will any price be exactly right as proved by the event.

After laying out how stock market prices are opinions of value, Williams rolls into the dynamics of explaining the power of the marginal opinion:

Both wise men and foolish will trade in the market, but no one group by itself will set the price. Nor will it matter what the majority, however overwhelming, may think; for the last owner, and he alone, will set the price. Thus the marginal opinion will determine the market price.

Think of it this way: You live in a neighborhood of 300 homes where everyone thinks the value of a house there should be $400,000— except one guy, who sells his for $375,000. He is the marginal opinion. So guess what price gets recorded in the real estate transactions page of the local paper? Do you panic and sell your house because the guy down the street sold his for less? Of course not. You have your own feeling for the value of your home and your neighborhood.

This is a highly simplified example, of course, but markets are like this. The marginal buyers and sellers set prices. And marginal buyers and sellers enter into transactions for all sorts of reasons, not all of them good or even rational.

Stock prices can rise even though the underlying business is getting weaker. And stock prices can fall even though the underlying business is getting stronger.

The takeaway here is the importance of viewing market prices as the settled transactions of marginal buyers and sellers. That’s all they are. They represent opinions of value at one point in time.

Put in this light, there is no reason to be worshipful of stock mar- ket quotes. They are simply prices to be taken advantage of or ignored, as the case may be. This is what the old master Benjamin Graham meant when he said the average investor would be better off without constant stock quotes—because the average investor makes too much of these prices.”


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