Price Vacillates, but Value Is Stable

Over the last few weeks, I've recommended buying shares in Overstock.com (OSTK - commentary - Cramer's Take), CarMax (KMX - commentary - Cramer's Take), Office Depot (ODP - commentary - Cramer's Take) and Mueller Water Products (MWA - commentary - Cramer's Take). Just because these are severely undervalued companies does not mean the price quote will jump forthwith. While price eventually migrates to value, anything can happen in the short term. Chalk it up to quote risk.

In my last column, I announced my intention to give investors 10 concepts and formulas that every investor needs to know and understand. I articulated the first two concepts:

1. The purpose of the market is to facilitate liquidity: The market does not provide valuation analysis. It tells you price. It does not tell you value.
2. Price does not equal value: All stocks are mispriced, some by a little, some by a lot. The value-centric investor, naturally, seeks to buy stocks where value exceeds price by a wide margin.

Here's the third concept:

Price change exceeds value change: If the market is going to provide cash offers each and every day, then you can't expect prices to be stable. Prices will fluctuate in a wide range. It should come as no surprise that prices oscillate by more 50% per year for the average stock, while value changes by less than 1% per month. Sophisticated investors seek to arbitrage the spread between the change in price and the change in value.

---

At time of publication, Alsin and/or ACM was long Overstock.com, Office Depot, Carmax, Tecumseh Products and Mueller Water Products, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an California-based investment advisor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.