Value Investing - Stock Price

Stock Price  


You can’t buy any stock at any price, right? The price you pay is ultimately determines your rate of return. You want to buy cheap to maximize your earnings.

The actual stock prices consist of two parts: 1) intrinsic value and 2) variance from the human emotion and dynamic market environments. So there are two basic methods to determine the price of a stock: 1) Fundamental Analysis and 2) Technical Analysis.

• Fundamental Analysis determines intrinsic stock prices by projecting future earnings and then applying an acceptable return on    investment to calculate the stock price. This approach is used by most traditional investment analysts.
• Technical Analysis applies statistical charts and techniques to historical stock prices and volumes to identify the future stock price trend. It does not consider the fundamentals of the stock. The business, or economic environment as the influence of these factors is deemed to be already reflected in the stock price.

http://www.trade4rich.com/Price.html

Intrinsic economic valuation versus price bidding in the market.

There are over 5,000 stocks listed on the major U.S. stock exchanges.  Each common stock is continuously changing and never stays the same. Thus the number of stock "deals" is unlimited. 

• You do not have enough time to estimate the intrinsic economic value of every common stock for every moment of every trading session. 
• The competitive, open-outcry, price-auction markets continuously provide bid and ask price quotations. 

Pricing conventions are used to provide a semblance of rationality in lieu of valuation. These conventions include 

• price multiples such as the price/earnings, price/book value, price/dividends, price/cash flow, price/sales and other accounting ratios. 
• Stock pricing conventions vary in applicability and popularity.

Intrinsic economic valuation versus price bidding in the market. 


The stock market participants at the price-setting margin and occasionally the market as a whole are exceedingly irrational. The most important that concerns us is that, in stock market investing, no bidding system can ever replace human judgment and interpretation of the facts based on intelligence, knowledge, and experience.

The Relationship of Intrinsic Value to Market Price - tracing the various steps culminating in market price.

In Security Analysis by Graham and Dodd, 1934 edition on page 23: "The Relationship of Intrinsic Value to Market Price.--The general question of the relation of intrinsic value to the market quotation may be made clearer by the appended chart [see table below], which traces the various steps culminating in market price. 

It will be evident from the chart that the influence of what we call analytical factors over the market price is both partial and indirect--

• partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and 
• indirect, because it acts through the intermediary of people's sentiments and decisions. 

In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.

Relationship of Intrinsic Value Factors to Market Price
I.General market factors				} Attitude of public toward the issue (leads to) } Bids and offers (lead to) } Market price
II.Individual factors	A.Speculative	1.Market factors	a.Technical
			b.Manipulative
			c.Psychological
	A.Speculative B.Investment	2.Future value factors	a.Management and reputation
			b.Competitive conditions and prospects
			c.Possible and probably changes in volume, price, and costs
	B.Investment	3.Intrinsic value	a.Earnings
			b.Dividends
			c.Assets
			d.Capital structure
			e.Terms of the issue
			f.Others

The radical difference between value and price is explained by John Burr Williams in The Theory of Investment Value as indicated in the following quotations: (1938: 33): 

• "If opinion were not founded in part on current dividends and changes therein, there would be nothing to prevent price and value from drifting miles apart." (1938: 191): 
• "Since market price depends on popular opinion, and since the public is more emotional than logical, it is foolish to expect a relentless convergence of market price toward investment value. Corroboration of estimates [of intrinsic economic value] by subsequent market action, therefore, ought not to be expected. After all, investment value and market price are two quite different things."

Thus:

Price is not value. Pricing is not valuation. Pricing models are not valuation models. Pricing models include: capital asset pricing model (CAPM), arbitrage pricing theory (APT), and option pricing.

 http://www.numeraire.com/margin.htm