How is a Stock's Value Calculated?
Making Money
If you talk to ten investors, you will get ten different answers as to how they value a stock. Some will value a stock by cash flows, some use dividends, some use earnings, still others have complicated mathematical formulas. This is the beauty of the market. No matter how much science we use to value a stock, the bottom line is that human beings value a stock. The market price of one share is the aggregate of what everyone in the market sees as the value of the stock.
If the market were a science, no one would make any money. Computers would run a bunch of numbers and the markets would never present a buying opportunity. People buy and sell stocks every day. No matter how automated we make the market, humans are behind all of the decisions. We are emotional, irrational beings. If you understand this and keep it in the back of your mind when investing, the ups and downs of the market make much more sense. Using this knowledge, you become a better investor.
How Do I Use This?
Here is a simple example. We had been following a small retail clothing chain. They sell high end mens clothing (suits) which is a relatively timeless, universal product. Suits don't go out of style in a couple of months like teen apparel. The stock took a huge hit when they reported a mediocre quarter. Earnings were OK, but analysts were concerned about the inventory level. We knew that inventory didn't matter much for this company because suits will sell next season. We bought some shares. We made a 44% profit in 17 weeks.
What Happened?
The earnings conference call got a little heated between the analysts and the CEO. Analysts peppered the CEO with questions about inventory levels. He calmly explained that this wasn't a teen retailer. Inventory levels weren't much of a concern because the fashions could still be sold at a later date. But the analysts refused to give up on the questions about inventory levels. The CEO then lost his cool and said that "we are wasting every one's time" by continuing to talk about the inventory levels. The CEO was right, but the analysts punished the stock that day. They came out with scathing reports about the company and said the CEO was losing control. The stock dropped 27% in one day. And they didn't even have a bad quarter! Now that's a buying opportunity!
The point here is that the numbers meant nothing to the performance of the stock. The human beings behind the stock made it move. The numbers were fine, the company was growing quickly and efficiently. They just had high inventory levels. A little research and understanding how the market operates was much more important than any math you could do.
The bottom line is that any stock is worth what others are willing to pay for it. Earnings don't matter. Assets don't matter. All the math in the world doesn't fully explain the movements of the market. The only thing that matters is how people feel about a company. If they feel good about a company, the stock will receive a premium price. If people feel bad about the company, the stock will be traded at a discount. Your task as an investor is to take advantage of people's feelings in the market and turn them into profits!
If you talk to ten investors, you will get ten different answers as to how they value a stock. Some will value a stock by cash flows, some use dividends, some use earnings, still others have complicated mathematical formulas. This is the beauty of the market. No matter how much science we use to value a stock, the bottom line is that human beings value a stock. The market price of one share is the aggregate of what everyone in the market sees as the value of the stock.
If the market were a science, no one would make any money. Computers would run a bunch of numbers and the markets would never present a buying opportunity. People buy and sell stocks every day. No matter how automated we make the market, humans are behind all of the decisions. We are emotional, irrational beings. If you understand this and keep it in the back of your mind when investing, the ups and downs of the market make much more sense. Using this knowledge, you become a better investor.
How Do I Use This?
Here is a simple example. We had been following a small retail clothing chain. They sell high end mens clothing (suits) which is a relatively timeless, universal product. Suits don't go out of style in a couple of months like teen apparel. The stock took a huge hit when they reported a mediocre quarter. Earnings were OK, but analysts were concerned about the inventory level. We knew that inventory didn't matter much for this company because suits will sell next season. We bought some shares. We made a 44% profit in 17 weeks.
What Happened?
The earnings conference call got a little heated between the analysts and the CEO. Analysts peppered the CEO with questions about inventory levels. He calmly explained that this wasn't a teen retailer. Inventory levels weren't much of a concern because the fashions could still be sold at a later date. But the analysts refused to give up on the questions about inventory levels. The CEO then lost his cool and said that "we are wasting every one's time" by continuing to talk about the inventory levels. The CEO was right, but the analysts punished the stock that day. They came out with scathing reports about the company and said the CEO was losing control. The stock dropped 27% in one day. And they didn't even have a bad quarter! Now that's a buying opportunity!
The point here is that the numbers meant nothing to the performance of the stock. The human beings behind the stock made it move. The numbers were fine, the company was growing quickly and efficiently. They just had high inventory levels. A little research and understanding how the market operates was much more important than any math you could do.
The bottom line is that any stock is worth what others are willing to pay for it. Earnings don't matter. Assets don't matter. All the math in the world doesn't fully explain the movements of the market. The only thing that matters is how people feel about a company. If they feel good about a company, the stock will receive a premium price. If people feel bad about the company, the stock will be traded at a discount. Your task as an investor is to take advantage of people's feelings in the market and turn them into profits!
Making Money
If you talk to ten investors, you will get ten different answers as to how they value a stock. Some will value a stock by cash flows, some use dividends, some use earnings, still others have complicated mathematical formulas. This is the beauty of the market. No matter how much science we use to value a stock, the bottom line is that human beings value a stock. The market price of one share is the aggregate of what everyone in the market sees as the value of the stock.
If the market were a science, no one would make any money. Computers would run a bunch of numbers and the markets would never present a buying opportunity. People buy and sell stocks every day. No matter how automated we make the market, humans are behind all of the decisions. We are emotional, irrational beings. If you understand this and keep it in the back of your mind when investing, the ups and downs of the market make much more sense. Using this knowledge, you become a better investor.
How Do I Use This?
Here is a simple example. We had been following a small retail clothing chain. They sell high end mens clothing (suits) which is a relatively timeless, universal product. Suits don't go out of style in a couple of months like teen apparel. The stock took a huge hit when they reported a mediocre quarter. Earnings were OK, but analysts were concerned about the inventory level. We knew that inventory didn't matter much for this company because suits will sell next season. We bought some shares. We made a 44% profit in 17 weeks.
What Happened?
The earnings conference call got a little heated between the analysts and the CEO. Analysts peppered the CEO with questions about inventory levels. He calmly explained that this wasn't a teen retailer. Inventory levels weren't much of a concern because the fashions could still be sold at a later date. But the analysts refused to give up on the questions about inventory levels. The CEO then lost his cool and said that "we are wasting every one's time" by continuing to talk about the inventory levels. The CEO was right, but the analysts punished the stock that day. They came out with scathing reports about the company and said the CEO was losing control. The stock dropped 27% in one day. And they didn't even have a bad quarter! Now that's a buying opportunity!
The point here is that the numbers meant nothing to the performance of the stock. The human beings behind the stock made it move. The numbers were fine, the company was growing quickly and efficiently. They just had high inventory levels. A little research and understanding how the market operates was much more important than any math you could do.
The bottom line is that any stock is worth what others are willing to pay for it. Earnings don't matter. Assets don't matter. All the math in the world doesn't fully explain the movements of the market. The only thing that matters is how people feel about a company. If they feel good about a company, the stock will receive a premium price. If people feel bad about the company, the stock will be traded at a discount. Your task as an investor is to take advantage of people's feelings in the market and turn them into profits!
If you talk to ten investors, you will get ten different answers as to how they value a stock. Some will value a stock by cash flows, some use dividends, some use earnings, still others have complicated mathematical formulas. This is the beauty of the market. No matter how much science we use to value a stock, the bottom line is that human beings value a stock. The market price of one share is the aggregate of what everyone in the market sees as the value of the stock.
If the market were a science, no one would make any money. Computers would run a bunch of numbers and the markets would never present a buying opportunity. People buy and sell stocks every day. No matter how automated we make the market, humans are behind all of the decisions. We are emotional, irrational beings. If you understand this and keep it in the back of your mind when investing, the ups and downs of the market make much more sense. Using this knowledge, you become a better investor.
How Do I Use This?
Here is a simple example. We had been following a small retail clothing chain. They sell high end mens clothing (suits) which is a relatively timeless, universal product. Suits don't go out of style in a couple of months like teen apparel. The stock took a huge hit when they reported a mediocre quarter. Earnings were OK, but analysts were concerned about the inventory level. We knew that inventory didn't matter much for this company because suits will sell next season. We bought some shares. We made a 44% profit in 17 weeks.
What Happened?
The earnings conference call got a little heated between the analysts and the CEO. Analysts peppered the CEO with questions about inventory levels. He calmly explained that this wasn't a teen retailer. Inventory levels weren't much of a concern because the fashions could still be sold at a later date. But the analysts refused to give up on the questions about inventory levels. The CEO then lost his cool and said that "we are wasting every one's time" by continuing to talk about the inventory levels. The CEO was right, but the analysts punished the stock that day. They came out with scathing reports about the company and said the CEO was losing control. The stock dropped 27% in one day. And they didn't even have a bad quarter! Now that's a buying opportunity!
The point here is that the numbers meant nothing to the performance of the stock. The human beings behind the stock made it move. The numbers were fine, the company was growing quickly and efficiently. They just had high inventory levels. A little research and understanding how the market operates was much more important than any math you could do.
The bottom line is that any stock is worth what others are willing to pay for it. Earnings don't matter. Assets don't matter. All the math in the world doesn't fully explain the movements of the market. The only thing that matters is how people feel about a company. If they feel good about a company, the stock will receive a premium price. If people feel bad about the company, the stock will be traded at a discount. Your task as an investor is to take advantage of people's feelings in the market and turn them into profits!
posted by zzzzzzzzzzz at
10:38 PM
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