Share valuation is Useless! Here is why.

Finally, I convinced myself of one thing. None of the factors in the share market is fixed; all are probabilistic.

Many advanced long term Investors/traders talk about probabilities in the market. But I am yet to see someone associate probability with the value of a share.

Usually, we see a fixed value is assigned to a share as the 'valuation'. Different methods may give different values but ultimately, everything boils down to a statement like 'the value of share-X is Rs Y/-'.

So we expect, if the market price of share-X is below Y, and if we buy, the share price will go up and give us profit. BUT most of the time it happens the other way around. Why?
And again, if Y was below the market price which indicate a future price drop, yet the price may go up and up. Why?

So what is wrong (with valuation)?
Is there any better valuation tool to address these?

Above questions haunted me for some time. But no more.
Because, by quite accidentally, I came across a tool which helped to change my perspective about the 'value of a share'.

Before me introducing the tool, think about the following scenario.

Suppose there is a share, fairly valued (not under or over); market price is Rs 20/-. It's a very steady priced share; will never ever come below Rs 20/- (say someone is buying any quantity at 20/- or something like that). Would you buy that share? Probably yes.
Well, here is the other part of the story. The share price is so stable that it will never ever go above 20/- either, and there will not be any dividend payouts either. Do you think this is a good investment?

On the other hand, suppose there's another share; market price is 20/-. But the price will heavily fluctuate between Rs10 and Rs 40/- but never beyond those limits. Do you think you can make some profits out of this share?

A traditional valuation method may value both above shares equally. But the 'share characteristics' are at two extreme ends.

Can we come up with some technique to see the difference in those two shares?

Well, I think I have an answer.
I would call it a tool to find 'share characteristic valuation'

Would you be interested to know more about it?
Pls let me know.

I would like to know more...please

Yeah.. pls proceed Hunter..

Most certainly. Thank you in advance.

Yes and yes, Please do.

Go ahead please.  

Me too in the line. Please do it for us man....

Good to hear from you another tool. Awaiting.
Different type of valuation and which each method is most appropriate refer the following link.
http://forum.srilankaequity.com/t17785-stock-valuation-methods?highlight=valuation

Its always good to explore new tools.

Yes pls hunter...

Ur 1st scenario reminds me KHL a bit.

This post is loosely an extension of my earlier post.
http://forum.srilankaequity.com/t31015-share-valuation-is-useless-here-is-why

...........................

They say 'market is always right'.
That means if we are contradicting ourselves with the market, we will be wrong. If we are aligned with the market, we will be right.
It sounds like a great idea to be aligned with the market so we are right always. But can we do that? If yes, how?
Before that;
What is 'market'?
..

I envision the market as a collection of traders like you and me (I consider investors as a subset of traders, so there are only short term traders and long term traders).
Then what makes the market move?
Different perceptions.

Let me take a simple example.

There is a market with 20 traders; they are very active; there are only 20.
Suppose there is a share; share-A.
First-trader thinks share-A worths Rs 50 in the long run; so, would buy at a price below 50 and sell at a price above 50.
Fair enough?
Now the second trader also thinks the same (Rs 50 is the fair value). All 20 traders think the same!

What do you think will happen to the share price in the market?
It would hardly ever move away from Rs 50. Agreed?
Imagine you be one of those 20 traders; Is share-A a good one to trade?

Now, there is another share, share-B.
The first trader thinks it worth Rs 20; the second thinks Rs 25 and so on. The last trader thinks it worths Rs 100.
Each trader has a different view on the value of share-B.
What would happen in the market?
Would share-B a good one to trade?

...


It is always good to have our own sense of a share value; but to have a sense about what others think as well is much better in trading.

...

There could be large number of methods to determine the value of a share. There could be (What I call) "Absolute" methods (DCF, Intrinsic value) and "Market/Industry adjusted" or "Relative" (x times of EPS, x % of NAV) methods.

I believe, there is a big synergy, if the value suggested by a "Absolute" method is confirmed by the market behavior.

............
Earlier, I said, the market is a collection of traders. Each traders action will make the market move.
Can we work out a tool to determine what each and every trader would do in the market?
Sounds like a big task; but if we can do it....

........

Quite accidentally, I stumbled upon a simple method that capable of showing multiple "absolute' values to portrait different market perspectives about a share value.
Furthermore, I call it a very flexible, adjustable, modifiable and expandable tool.

I will give calculating details and the concept behind the it later.

First, like to describe how I interpret the outcome.
I will show below 20 values given by the tool for some selected shares. As input, I have used recent published business data only. (Optionally, we can use any estimated data if we wish)

We can consider the 20 values as the perspectives of 20 different traders. So, as in the example we took earlier, Those perspectives can drive the market.


Now, here are few selected examples; the values highlighted in green are supposed to be considerably higher than the market value; which suggest a "Under valued" condition. The Red shows exactly the opposite.

Please note that these results are given based on the INPUT values I have fed. There could be more accurate inputs worked out always.

Here are the results for GLAS, TWOD,TESS.

GLAS: - Suggests a very stable price. But with very little movement. May not be the ideal for trading
TWOD:- Suggests huge, bizarre deviations possible.
TESS:-  Suggests possible market movements but looks a bit overvalued



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Here are three more "trade-able" shares. Two to pick up and one to avoid (That's what the tool suggest).




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I like to know your views:
Do these results make any sense?
Would you like to know the calculation details?

Thanks all for all the interests shown.

I made the first cut available in a new post.

http://forum.srilankaequity.com/t31029-share-characteristic-valuation-interpretation-of-the-tool

Hope I have presented my points clear enough.

Thanks, waiting for the calculation details.

Thank you its a Good attempt.

Would you like to know the calculation details?
yes

Thank

Here are the calculation details:
http://forum.srilankaequity.com/t31038-share-characteristic-valuation-calculation-details

Enjoy reading

Very interesting articles to read.

Sstar wrote:Very interesting articles to read.

I dont know how I missed this article from hunter I suppose.i would fairly and squarely reject it.the article mentioned above discusses about 2 types of shares.in share market how can one guarantee a share. A value you pay per share is perceived by its earning.all this valuations methods are meant for investors to understand that the price they pay is a reasonable or a premium.this facilitates a trigger point to buy or wait till it comes down.we can discuss this further.

No value investor says its 100% guarantee. That share prices will come below.but if you have bought at the correct value you need not worry and have 2nd thoughts.we all need valuation methods.same like you do a valuation for vehicle.if its useless then what do you do ?

In short father of value investing benjamin graham and warren buffet are useless   were they just wasting their time

I think more than having different valuations as suggested by Hunter, although th ecaption of the Thread is somewhat misleading to start with.In fact what hunter has done is to use multiple values per share to creat volatility in the Market.Its ok but when you have different values then people tend to confuse alot whether i sell or hold etc.
The main focus should be on what shares to bUY when the valuation method prompts you a particular share.
It is my opinion when you stick to certain method and its working you need not worry much.all you can do is to review their AR work out the valuations as per latest data and adjust your PF if necessary without compromising longterm growth aspects of the company you invested.

small impediments/issues should not sway you from bigger goals.

SHARK wrote:In short father of value investing benjamin graham and warren buffet are useless   were they just wasting their time

Well Said