Picking A Value Metric

There are numerous methods of valuing a company’s stock value.  When you peruse through all the articles and books it can be overwhelming.  So many different metric methods, and so many different people standing behind or referring to different methods that they use.  I stand in the value camp, and tend to use one value concept as my strainer which helps me to sort through all the ideas before I choose to spend more time on any one investment idea.

What is most important to me when scrubbing a business is to get a sense of the potential downside should something negative show up.  To do this I use multiple metrics to generate that sense.  Even though I may have a sense of where the stock’s price could land I still could be wrong.  Ultimately, the stock market is a willing buyer and willing seller transaction, and in order to stop a fall the buyers have got to be sizable in their orders, and the selling volume usually has to dwindle.  There has to be more willing buyers than willing sellers to reverse a fall.

Understanding Downside Value

No one can actually know where a price could move to before it stops.  Just as an investment analyst can’t know what the ultimate true value is of a stock due to the willing buyer and willing seller concept.  Over the years I’ve seen where an analyst values a stock at a certain value and yet the stock never gets there.  Not enough willing buyers to drive the price there.  

This reasoning above is why value investing tends to work better than most ideas (except in neutron bull markets).  Value investing’s metric of purchasing something at a discount usually means that most of the other valuation metrics will price higher than say a net net value determination.  This would mean the margin of safety on the downside would put this purchaser in a better spot.  

Value

In the end there are no perfect valuation methods that will work all the time.  All you have to do is take a look at the king Warren Buffet as his history has blemishes.  Some of his investments didn’t work out, and he has sold off positions that eventually renewed themselves to turn into growers.  Yet Buffet’s methods do outperform more often than most as evidenced by his success.  

My recommendation is to always make sure you have a big picture view along with your micro view.  It’s often about just putting the odds in your favor with your metrics and being patient.  An investor’s greatest edge is time once there’s a calculated value.  The bottom line is make sure you backup your ideas with metrics and using more than one is a good idea.

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