DionysusToast
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Interesting discussion.
The search for an 'undervalued' company must be done in the belief that a company can trade at a discount to it's value. In other words that Price is disconnected from Value.
All concepts/methods of valuation are subjective. In the methods I have seen used, the risk free rate is used as well as a method of calculating the future value of todays cash. These are used to discount todays profits and tomorrows growth so that the investment can be compared against sticking the money in the bank. Just that alone is a very subjective process and we haven't even looked at the company yet.
Anyway - we must accept that a stock can be below value. We must also accept that two people will come up with different values.
Price needs a catalyst to cause buying to move price up. Earnings, Economic news, Industry/Sector developments etc. etc. etc. This is really what most fundamental trading is about. Recognising the catalyst prior to it becoming public information. Or even reacting to it when it occurs as price often moves for an extended period on a catalyst.
Simply buying something that we mathematically calculate to be below value is asking for trouble. First of all, it could remain below value for years or decades. Secondly, it could be below value because someone knows something you don't.
For your average investor, with a few 100k in the bank, to park a significant portion in stocks you deem to be undervalued would be like leaving it in a current account at the bank, although with a lot more downside risk.
The search for an 'undervalued' company must be done in the belief that a company can trade at a discount to it's value. In other words that Price is disconnected from Value.
All concepts/methods of valuation are subjective. In the methods I have seen used, the risk free rate is used as well as a method of calculating the future value of todays cash. These are used to discount todays profits and tomorrows growth so that the investment can be compared against sticking the money in the bank. Just that alone is a very subjective process and we haven't even looked at the company yet.
Anyway - we must accept that a stock can be below value. We must also accept that two people will come up with different values.
Price needs a catalyst to cause buying to move price up. Earnings, Economic news, Industry/Sector developments etc. etc. etc. This is really what most fundamental trading is about. Recognising the catalyst prior to it becoming public information. Or even reacting to it when it occurs as price often moves for an extended period on a catalyst.
Simply buying something that we mathematically calculate to be below value is asking for trouble. First of all, it could remain below value for years or decades. Secondly, it could be below value because someone knows something you don't.
For your average investor, with a few 100k in the bank, to park a significant portion in stocks you deem to be undervalued would be like leaving it in a current account at the bank, although with a lot more downside risk.