Stock Valuation – The Art and the Science
Warren Buffett is one of the most famous investors of our time and is a stock valuation pro. He learned most of what he knows from Benjamin Graham – the KING of Value Investing.
“Long ago, Ben Graham taught me that price is what you pay, and value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” – Warren Buffett
Stock valuation involves analyzing a company from many different angles to determine an intrinsic value. This intrinsic value will either be above or below the current stock price. If the value you arrive at is above the stock price – buy it! It’s cheap. If the value is below the stock price- sell it! It’s expensive.
Not everyone is a fan of value investing; it’s more of a long term approach. Hundreds of thousands of traders around the world pay little attention to the value of a stock, instead raking in big bucks betting on fluctuations in the price of the stock. Day trading, however, is incredibly risky and very few make money at it in the long run. To make an informed investment decision it’s wise to analyze the value of the stock before buying.
Stock valuation is as much an art as it is a science. Running a discounted cash flow is somewhat of a science. Deciding which assumptions to put into that model – that is an art. Looking back over historical earnings and performance is a science. Modeling future sales based on industry knowledge and macroeconomic forecasts – that is an art.
There are lots of tools publicly available to assist you in performing stock valuation. We’ve developed two free tools that take care of the science for you, allowing you to focus fully on the art.