M-02 · Lesson 1 / 4 · schedule 12 min read

Price Prediction vs. Value Determination

There are only two fundamental ways people try to make money in markets. Understanding which one you are playing — and which tools belong to which camp — is the single most important distinction in investing.

You may be asking yourself what this whole idea of "determining value" is really about—and why it matters at all.

Let's simplify it.

There are only two fundamental ways people try to make money in the market:

Two approaches to profit

1) Price prediction

You buy something today because you believe someone else will pay more for it in the future.

You're trying to anticipate how the market will behave—what other people will think, feel, and ultimately pay. Your success depends on being right about future prices.

2) Value determination

You buy something today because you believe it is worth more than the price you're paying right now.

You're not relying on the crowd. You're relying on the business itself—its ability to generate cash over time. Your success depends on being right about what the asset is actually worth.

The core distinction

Both approaches start from the exact same place: today's market price.

The difference is what you believe drives your return.

  • In price prediction, your return comes from someone else paying more
  • In value determination, your return comes from the asset delivering value over time

The three main ways people analyze stocks

Most investors—whether they realize it or not—fall into one of three camps:

  • Technical analysis
  • Relative valuation
  • Intrinsic valuation

The first two are different ways of playing the price prediction game.
The third is firmly in the value determination camp.

Let's briefly walk through each.

Technical analysis (reading the market itself)

Technical analysis focuses entirely on price movements and patterns.

Instead of asking what a business does or how much money it makes, technical analysts study:

  • Charts of past prices
  • Trading volume (how many shares are being bought and sold)
  • Patterns and indicators

The idea is that all known information is already reflected in the stock price, and that human behavior tends to repeat. If patterns repeat, then price movements can be anticipated.

In practice, this looks like:

  • Drawing trendlines on charts
  • Identifying patterns like "head and shoulders" or "support and resistance"
  • Using indicators that signal when something might be overbought or oversold

At its core, technical analysis is asking: "Based on how this has traded before, where is the price likely to go next?"

It is purely a price prediction tool.

Relative valuation (pricing by comparison)

Relative valuation looks outward instead of backward.

It asks: "What are similar assets trading for?"

You compare a company to other "similar" companies and look at how the market is pricing them relative to their performance.

For example, you might compare:

  • Price to earnings (how much investors pay for each dollar of profit)
  • Price to sales
  • Other ratios that link price to business performance

A useful way to think about this comes from Benjamin Graham, who described the market in the short run as a voting machine—prices are driven by opinion and sentiment.

In practice, relative valuation looks like:

  • Finding comparable companies
  • Adjusting for differences (growth, risk, margins)
  • Estimating what your company "should" trade for based on those comparisons

It's more grounded than technical analysis — but it's still ultimately asking: "What will the market be willing to pay for something like this?"

The quiet problem

Relative valuation compares price to price. If the entire market is mispriced, so is your benchmark. You can be "cheap relative to peers" and still be expensive in absolute terms — the comparison doesn't tell you what anything is actually worth.

Intrinsic valuation (pricing based on what it produces)

Intrinsic valuation flips the question entirely.

Instead of looking at charts or other companies, it asks:

"What is this business actually worth?"

Here, you focus on:

  • The cash the business can generate over time
  • How fast it can grow
  • The risks involved in achieving those cash flows

Think of earnings as the money left after paying all the costs required to run the business. Intrinsic valuation is about estimating how much of that cash you, as an owner, can expect to receive in the future—and what that's worth today.

This approach is closely associated with investors like Warren Buffett, who emphasizes buying businesses, not tickers.

In practice, intrinsic valuation looks like:

  • Forecasting future cash generation
  • Adjusting for risk and uncertainty
  • Determining a price that makes sense independent of the market's opinion

Putting it all together

Summary
  • Technical analysis → Predict price using patterns and behavior
  • Relative valuation → Predict price using comparisons to other assets
  • Intrinsic valuation → Determine value based on what the asset actually produces

The first two answer the same question: "What will someone else pay for this later?"
The third asks something fundamentally different: "What is this worth to me today?"

Where this is going

All three approaches are widely used. All three can appear convincing. And all three have weaknesses—some of them subtle, some of them dangerous.

In the next three lessons, we'll go deeper into each one:

  • What it looks like in practice
  • Why people rely on it
  • Where it breaks down

And when we get to intrinsic valuation, we'll separate what feels like investing from what actually is.