Valuation
After reading the article below:
It got me thinking about one fundamental problem in our daily lives. Valuation.
If I show you a nice house, how much do you think it’s worth? I’m sure you’d say: "that depends…". Well, you’re right, that depends on a lot of factors. How big the house is, how close it is to amenities, the neighbourhood it’s in, the built quality - and so on. But still… that doesn’t answer my question, what do you think it’s worth? $200k, $400k? or even half a million dollars?
What most people would fail to notice, is that the value of the property - most of the times are decided not by the things we can see. If you’re the owner of the house, of course you’d like to be assessed as much as possible, but if you’re a buyer, you’d like to get it at the lowest price possible. Obviously, the buyer and the seller needs to agree on a fixed price before the transaction can go ahead, how do they do the valuation. In the case of property, it’s not that hard… you look at other similar properties in the vicinity that was sold recently and compare the prices. Voila! you have the price of the property.
Simple isn’t it? (if you’re not a property player I’m sure you’d say yes).
Now, let’s consider stock market. How do you know about the value of a stock? Whether it’s overvalued or undervalued? The wisdom is simple, buy undervalued stocks and sell overvalued ones. If you can do that all the time, you’d be the richest person on earth in less than one year. Here’s the crux of the matter however, valuation IS about predicting the future. A stock may worth $105 now, but aside from God alone (and I don’t think God buys stocks!) who knows what it will be worth 3 months from now? Of course, there’s always some genius making guesses based on the company assets, earnings forecasts, market capitalization… and so on. But one fundamental problem with stock market are, that the players in it are human beings. And predicting the course of decision of a collective human being is like predicting which horse will win the horserace. It is at worst gambling, and at best - calculated gambling (which is still, gambling, nevertheles).
And as with gambling, you have winners and losers. Only in this case, the winners of stock market can always say that they have a methodical way of picking stocks. But, if you ask the losers, they also have their strategies too!
I guess, at the end of the day, a good rule of thumb is: the value of something is how much someone is willing to pay for it. All you have to do is to analyse that ’someone’ (be it your customers, buyers, or even other stockholders) - you have to see the object from their point of views. Most people failed to notice this - they cling to their own perception instead. The closer your analysis about their perception, the better your valuation skill is.
