01 learn to value and better grasp the opportunity of buying and selling

Valuing a stock is a crucial part of an investment. If you buy when the stock valuation is very low, the probability of making money may increase, otherwise, it will increase the likelihood of losing money.

However, valuation is actually an art. Stocks in different industries may have different valuations, and the valuation of the same stock may also change in different periods.

So how do you value a company? What valuation methods are there? What are the factors that affect valuation? How should valuation theory be applied?

In order to help you solve these problems, Niuniu has done a course on valuation. The course mainly consists of five sections:

Why do you want to learn valuation
Introduction to valuation of price-to-earnings ratio
Introduction to the valuation of price-to-book ratio / price-to-sales ratio
Other factors affecting valuation
Practical application of valuation

In the first section, let's talk to you about why we need to learn valuation. It mainly includes the definition of valuation, the benefits of learning to value, and a brief introduction to common valuation methods.

1. What is valuation?

In the field of stock investment, valuation is to evaluate the intrinsic value of a stock.

Some novice investors may associate the stock valuation with its trading price, believing that the higher the share price, the higher the stock valuation.

In fact, the stock price represents only the market value of a share. The total share capital of most listed companies is hundreds of millions of dollars. Multiplying the stock price by the total share capital is the total market value of the stock.

For example, Berkshire Class A shares cost hundreds of thousands of dollars each, but the total share capital is only about 1.5 million shares, so the total market capitalization is less than $1 trillion. Apple Inc's share price is a few hundred dollars, but the total share capital is more than 16 billion shares, so the total market capitalization is as high as trillions of dollars.

The total market value of a stock is its value in the current market. The process of valuation is to evaluate its intrinsic value, and then judge whether its total market value is overvalued or undervalued, so as to provide a reference for investment decisions.

2. Why do you want to learn valuation?

There are two most critical decision points for stock investment: when to buy? And when will it be sold? To a large extent, the decisions to buy and sell need to be judged by valuation.

For stock buying decisions, when you are optimistic about the development of an industry, you may assess the inherent valuations of listed companies in the industry. If you find that the market value of a stock is significantly lower than the reasonable valuation you accept, then you may use it as a potential buying target.

For stock selling decisions, when you hold a stock and the stock price rises over a period of time, it has exceeded your reasonable valuation, or when the fundamentals of the stock deteriorate, resulting in a decrease in intrinsic value and below the current market value. At this point, you may also consider selling the overvalued stock.

In addition, valuation can also be used as a reference for risk assessment. For example, when market conditions are bad and most stocks are falling, especially when high-valued stocks fall more sharply, you may consider reducing your overall stock position in order to reduce risk.

At this time, stocks with relatively low valuations may have a higher margin of safety and have less potential decline, while stocks with relatively higher valuations may have a greater potential decline. Therefore, when reducing your position, you may give priority to selling stocks with relatively higher valuations in order to better control the overall position risk.

3. What are the valuation methods?

All valuation methods can be divided into absolute valuation method and relative valuation method.

Absolute valuation method is a discounted cash flow pricing model valuation method, including discounted free cash flow model and dividend discount model. The principle is that discounting all the company's future cash flow to the present and adding up these discounted values is the intrinsic value of the company.

Just like Warren. Buffett said: "the intrinsic value of an enterprise is the sum of the discounted value of free cash flow over the duration of the enterprise." "

However, the principle of the absolute valuation method looks very scientific, but in practice it may be difficult to apply. Because a company's annual cash flow is uncertain, no one even knows whether Apple Inc will survive for 20 or 200 years. At the same time, the discount rate will also change with the interest rate environment and risk preference, which will lead to a great deviation in the calculated intrinsic value. Just like Charlie. Munger once said jokingly, "I've never seen Warren calculate that thing." "

Compared with the absolute valuation method, the relative valuation method is more widely used and we may be more familiar with it. The most common relative valuation methods include price-to-earnings ratio, price-to-book ratio and price-to-sales ratio.

Among them, price-to-earnings ratio valuation is the most widely used valuation method, which is mainly suitable for companies with stable profits. The formula is: price-to-earnings ratio = stock price / earnings per share, or total market capitalization / net profit.

The price-to-book ratio is mainly applicable to companies with unstable profits. The formula is: price-to-book ratio = stock price / net assets per share, or total market value / net assets.

The market-to-sales ratio applies to companies that are not yet profitable. The formula is: market-to-sales ratio = stock price / sales per share, or: total market capitalization / operating income.

In the follow-up, we will mainly introduce the more widely used and simpler relative valuation methods.

The above is the overall introduction of valuation, including the definition of valuation, the role of valuation and the specific methods of valuation. In the next section, we will introduce the most commonly used valuation method-price-to-earnings ratio.