Doug Kass writes this morning that "Our job (or at least how I implement my strategy) is to develop a sense of fair market value or intrinsic value against the current price level for stocks. When the gap widens (and prices are substantially lower than that calculated value) I buy... and vice versa. "
Doug's argument is that price has no relationship to 'value' and we should take advantage of price when it does a poor job of reflecting reality.
That certainly is a very logical explanation for his approach to market. I don't disagree with that thinking but I look at it differently. I view price as a reflection of what the market is thinking and feeling. The market may be irrational at times (maybe even most of the time) but I'm not going to win an argument with it. My goal is to make money when price changes and that has little to do with intrinsic value quite often.
Price is truth because it is what determines our level of profits. It doesn't help us at all if we believe that the intrinsic value of a stock is $20 and the market says its $10. Maybe the market will change its mind and eventually agree with us but if the market insists that it is correct then that price is the reality and reality is truth.
J.C. Penney (JCP) is trading up about 30% this morning on 'less worse' than expected fourth quarter earnings numbers. Sales declined 8% quarter over quarter and EPS dropped 65% but it wasn't the total disaster that many anticipated.
Back in 2007 JCP was trading in the high $80's. It has been in a downtrend for years and it doesn't take a genius to extrapolate from this action and predict that it may not survive.
I have no idea what the 'intrinsic value' of JCP might be but the price is telling me everything that I need to know. I don't want to own this stock because the market has made it quite clear that it doesn't think it has a future. The market is wrong sometimes just like intrinsic value but the market is going to make the final call in this situation. Even with a rally today, price is telling us to stay away.