NOTE
Valuation
English translation of the original VNote “Valuation”, preserving its structure with only necessary small corrections.
This is a historical learning note and may contain outdated or incomplete understanding.
1. What Is Valuation?
- Value investing discusses the relationship between a stock’s price and a company’s value. Stock price can be observed directly, while intrinsic value cannot, so it must be estimated.
2. Valuation Methods
2.1. Absolute Valuation
2.2. Relative Valuation
2.3. Absolute vs. Relative Valuation
Absolute valuation emphasizes holding the company to receive its long-run/free-cash-flow stream. Relative valuation emphasizes holding until some future date and estimating the market value at which the stock could then be sold.
3. Discount and Premium
3.1. What They Are
3.1.1. Discount
Estimated value > current price means the stock trades at a discount, so the discount rate is above zero. This only means the valuation model’s estimated value is above the current price; it does not guarantee a profit after purchase.
3.1.2. Premium
Estimated value < current price means the stock trades at a premium, so the discount rate is below zero in the note’s convention.
Discussion
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