Warren Buffett described 37 years ago a brutal fact that most people never learn.

It’s about what you are worth versus what others think you are worth.

This is a story about a key truth that Warren Buffett explained years ago and recently pondered while reviewing my free e-book, Warren Buffett Predicts the Future,” said Bill Murphy, Inc. columnist.

L to reflection explains the incredibly high value of a single share of Buffett’s company, Class A Berkshire, which yesterday closed at USD 400,000 action, making it by far the highest price traded.

Why are Berkshire Class A shares so expensive? (worth more than the median price of a single-family home in America, which was $ 315,900 at the end of 2020) –

It is indeed a legitimately valuable company (although not by far the most valuable). Still, the answer is that Buffett is determined never to divide the shares. But why is it so complicated at this last point?

Some Buffett wrote 37 years ago – in his shareholder letter 1984 that includes an interesting explanation: The key to rational stock prices is rational shareholders.

We want those who consider themselves business owners and who invest in them intending to stay a long time”. And he added: “If we divided the shares or took other measures focused on the price of the shares and not on the value of the company, We will attract buyers less than the seller class.

The reflection is based on the intrinsic value of the action and how people might react based on its perceived value.

Berkshire was trading at about $ 1,300 a share when Buffett wrote that, while it was expensive, those who bought shares in 1984 could afford the expense. That is no longer accurate for Berkshire Class A shares, but in 1996 Buffett created a second class of shares, Berkshire Class B, in part to address this issue. Those stocks are trading at a much more realistic level – about $ 266.

To understand this now, one must take into account the degree of the link between Buffett and Berkshire. With more than 50 years at the company’s helm, he is the longest-serving CEO on the S&P 500. He admitted that his sense of self-worth is tied to Berkshire’s stock price. “My ego is wrapped up in Berkshire.

He told a reporter years ago that there’s no question about it when Berkshire was trading at approximately $ 3900 shares. Later, biographer Alice Schroeder was reinforced by the idea.

“I can guide my whole life by the Berkshire price.

Clearly, Buffett sees high stock prices as a marketing asset to leverage, not as a challenge to overcome.

And while hardly anyone else is faced with the exact stock price problem he has, I bet you spend a lot of time at your company thinking about the prices to charge for various products and services. Price can reflect value, but it can also – probably more often, if we’re honest – reinforce value perception. It is a brutal truth that many people do not quite understand”, analyzes Murphy.

The author gives three pieces of advice from Buffett’s reflection:

1- Whatever you sell, when you think about price, imagine what goes through a potential new customer’s mind when they realize that you are half as expensive – or twice as much – as a competitor.

two-Think of a freelancer who offers his services at $ 35 an hour, without knowing anything else about him, is sending a very different signal than a competitor who sells his services at $ 100 or $ 250 an hour.

3-Or, think of a manufacturer selling products for $ 200 per item in a market with competitors selling for $ 150 and $ 250. Customers assume, at least initially, that there is a corresponding difference in value. But the perception of value is as likely to be derived from price as price is derived from an actual value.

Murphy notes, Going back to Buffett, imagine how comfortable investors might look at it differently, if not for the fact that their company is now trading at about 35,000 times. When he first bought it in the 1960’s.

It is that Berkshire, with a split of shares – in which each one is sold for one-thousand of its current price – it would be worth exactly the same. But people are not always rational. And besides, many of them are not very good at simple math,” he adds.

That’s something to keep in mind when thinking about price and value. Rational stakeholders, as Buffett wanted in 1984, can be wonderful. Still, emotional connections can be worth much more than the numbers might suggest.