Chapter 6 · Fundamental analysis
Putting a value on it
Valuation is a range with assumptions, not a number. Anyone giving you one number is hiding something.
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Having read the accounts, the question is what the business is worth — which is a different question from what it currently trades at. The gap between the two is the entire opportunity, and the entire risk.
Two honest approaches
- Relative. Compare its ratios to similar companies in the same sector. Quick, and only as good as the comparison.
- Absolute. Estimate the cash it will produce and discount it back to today. More rigorous, and extremely sensitive to assumptions you cannot verify.
Write your estimate and your assumptions down before you buy. When the price moves, that note is the only honest record of what you originally thought — memory rewrites itself to match the price.
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