This glossary of financial terms is inspired by Ambrose Bierce’s masterpiece The Devil’s Dictionary, which the great American satirist published sporadically between 1881 and 1906. (View free versions of Bierce’s text here or here.) Like Bierce’s brilliantly cynical definitions, the explanations presented here should not — quite — be taken as literally true. Some of these entries are adapted from articles published previously in Financial History, Money, and The Wall Street Journal.

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V

 

VALUE, n.  What an asset is worth to a sensible buyer with access to all information necessary to appraise it, based on the cash the asset is likely to generate over its life. The value of a stock depends on the cash-producing potential of the underlying business, which barely changes quarterly or monthly, let alone from day to day. The PRICE of a stock, on the other hand, can change thousands of times in a single day even if the business of the company is utterly unaffected by any of the events that traders are reacting to.

The term value causes great confusion, as when journalists write, “The stock lost 20% of its value today….” But it didn’t lose 20% of its value; it lost 20% of its price. The value of the underlying business almost certainly changed much less — if at all. Price is measured moment-to-moment; value, properly understood, unfolds over months and years. As Benjamin Graham taught Warren Buffett: “Price is what you pay, value is what you get.”

 

 

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