Close for now Do you hold SG, US, HK or MY stocks? How are you tracking them now?
View our Demo portfolio to learn how StocksCafe will do it for you intelligently!
Sign up for free now!

Subscribe to RSS feed How Much is a Stock Worth?

By evankoh posted on 17 Aug 2015  -  8,789 views


Recently, I read a book, A Random Walk Down Wall Street by Burton G. Malkiel. In the book, he discussed two ways to valuate a stock - The firm-foundation theory and the castle-in-the-air theory.

The firm-foundation theory assumes that each stock has a true value which is equal to the present value of all its future dividends. It is likely that you have heard something similar because this approach is somewhat similar to Warren Buffett's style of "buying securities whose prices are below the true value, and selling those with prices are above the true value".

Of course, the challenge is in determining the true value, which can be broken down into two parts.
1) Forecasting of future dividends of that stock, and
2) Estimating the (current and future) market interest rate.

The castle-in-the-air theory is also known as the "greater fool" theory. It does not matter how much you pay for any stock as long as you are able to find a "greater fool" who is willing to pay more for it. A story mentioned in the book is that stock investment is like entering a newspaper beauty-judging contest where one must vote for the prettiest face out of a hundred photos, and the prettiest face is determined by the largest number of votes. It is basically saying that the true value of a stock does not matter as much as its perceived value by investors.

The way I translate these two theories to practical strategies to support my stock-buying decisions is as follows:
1) I favor stocks that are likely to have good future dividends (I will forecast this using a simple approach until I find better and more reliable approaches).
2) I try to avoid being the "greater fool" by shunning all stocks with high P/E (using STI's P/E as a gauge).


Like
3 likes
1 comments

sggamelover - We should always use The firm-foundation theory.
15 Jun 2016 09:03:17



Next Article > < Previous Article
How to retire? A Simple Trend Analysis of Dividends



List All Articles Other articles by evankoh

Quick Updates: Dividend Withholding Tax and More
Merry Christmas! I hope you are enjoying yourself this holiday season. Just wanted to quickly share some changes I have made over this weekend: Dividend Withholding Tax As StocksCafe recently started supporting US stocks, some users have requested for StocksCafe to automatically adjust for dividends based on individuals' tax status. For example, most Singapore residents would incur a 30% tax on all ...

Annualized Dividends and P&L For Your Portfolio
Many features that you see in SGXcafe are requests made by users. I appreciate feedback and feature requests from users, and do my best to make it happen whenever possible. Therefore, if there is any feature that you wish to see in SGXcafe, feel free to let me know! This weekend, I spent some time working on adding new columns (e.g. annualized dividends % and annualized P&amp;L %) to current portfolio ...

SGXcafe Will Continue To Stay Free
Long Story Short SGXcafe will continue to be free, but to cover for the high operating costs due to licensing, I would like to invite you to do one or more of the following if you would like to show your support for SGXcafe. 1) Help increase awareness of SGXcafe. You can do this via your blog, share SGXcafe's articles on facebook, or simply via word of mouth to people whom you believe can benefit from ...