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About The Subtle Art Of Stock Valuation
In the capital markets we say – Valuation is both an art and a science. If you have ever invested in markets or tracked any particular stock you would know the importance of timing. Wrong investments and timing can wash away years of your hard earned savings. Timing in capital markets really corresponds to one factor called Value. Good timing means proper entry and exit at correct price levels. So, the only way to make money is to know the value of what you are buying or selling.Making money in the stock markets is very easy. Just follow the fundamental rule, buy the stock at a price below its actual value and book your profits when its way above its actual value. This is where it gets tricky, how do you value something which is so much volatile and whose prices changes every day. It’s not actually that hard. You need to understand the very basics of what a share of a company means.Each share is a right of ownership to the company including the assets, cash flows and dividends. Basically each share you buy gives you an entitlement to a future payout that the company is going to make. Theoretically today’s price of a stock is the sum of all the payments that the company will make to the shareholder, discounted back to its present value. This forms the basis of the Dividend Discount Model (DDM) which we will use in our valuation process.However, not all the companies pay dividends, so there are other ways we can value their shares. In one method call Discounted Cash Flow (DCF) valuation, we apply the same theory of Dividend Discount Model on the entire company instead of its individual shares. We discount the free cash flows to the company instead of the dividends to their present value. The sum of all these present values gives us the value of the company. If we divide this by the total number of equity shares we get the value of each share. Both the DDM and DCF methods takes care of the quantitative aspects (primarily the ability to generate cash flows). The method called Relative Valuation or Multiple Based Valuation, takes care of the qualitative aspects like economic advantage over competitors, management compatibility, market expectations of growth etc. Combined a mathematical model consisting of all the three methods takes us very close to the actual value of the company’s shares.Once you have mastered this art, you will slowly start understanding markets and start making a successful investment decisions. This is where we come into picture. Our aim is to get you started on this journey of wealth creation and make you an Intelligent Investor.This book will serve as your reference on the subtle art of valuation and will be your guide for successful Investing. We will take the case study of one company throughout the book and will use it as an example in each chapter. By the time you reach till the end of the book, you will have both the theoretical knowledge and a practical example of how to go about stock valuation process.Wishing you all the best and Happy Investing!
