Is it possible to calculate correctly the fair value of a stock?
Morningstar (among others) is in the business of doing this. I don't care to speculate on how successfully. See http://www.morningstar.com/market-valua … graph.aspx
In reality, the "Stock Market" has traditionally been a 6 to 12 month discounting mechanism, give or take for extenuating circumstances, which determines a "Projected" future market value ONLY not true value. Buyers & Sellers Agents line up at a physical or virtual "Market Makers" or "Specialists" post to swiftly negotiate what they "Think" a fair price for the issue would be at that particular point in time based on S&D.
Are they 100% accurate all the time? If they were always "Spot On" with prognostications there would probably be no more Buyers & Sellers in existence right? Each participant would have certainly banked enough shillings to have purchased that cozy little 2000 bedroom, 1000 car garage castle located on the "Island" right next door to country legend Kenny Chesney, hence why bother with trivial matters such as making even more cash? Don't worry about finances Just gently move that little pink paper umbrella to the side and sip another sparkling pink beverage.
One way to determine "Intrinsic or Real Value" is to look at what is called the "Book" which is an accounting measure that typically provides a more accurate reflection of a company's current net assets or overall worth rather than spotting a somewhat arbitrary share price based on future speculation. A divergence of "Book" price per share verses "Market" price per share almost always exists.
Hope this helps,
- Alternative Prime -
Thank you so much Alternative Prime for taking your time to write an intrigue answer, it makes me thinking. Appreciate it and cheers!
No. An absolute valuation model does not exist. The value of the stock is a function of the investors buying and selling it. That being said, you can compare a value to what comparable companies are trading for, or what the company itself has historically traded at based on fundamentals.
It is like the housing market - you compare your house to your neighbors. The cost of the house is easily calculated but value is something intangible becuase 'beauty lies in the eyes of the beholder'.
Still, you can profitably trade using strategies that capitalize on growth trends, investor sentiment, etc. etc. You can even backtest these at places such as Portfolio123 (use code HKURTIS to get a 45 day free trial).
The tangible book value is the closest thing I can think of to value a company - but this is more closely related to bankruptcy value than it is trading value and future growth prospect. You figure this one out and you'll be a trillionaire.
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