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Posts Tagged ‘Valuation’

Chicken RiceThere is no stock market ticker to tell you how much you should value your chicken rice.  Yet you can always sense when it is over-priced or under-priced.  Assume that there is a stall owner who happens to sell the world’s best chicken rice that you love to eat.  It’s tasty, delicious and everything you could ever ask for. 

Then suddenly, the nice owner realises that he could change his prices just to see how you would react.

  1. Price drops to 10 cents – You go hysterical!  You secretly plan to stock up a gazillion plates of your favourite dish.  The owner sees this and senses something amiss with you salivating in front of his stall.  He changes the price.
  2. Price rises to 6 million dollars– You go hysterical (in a bad way) again!  Your face turns black in anger and wonders how many folks can really afford it.  As you sulk, the owner realises that pricing his chicken rice to the same as his favourite TV show (6 million dollar man) is not going get him any customers.  He then changes the price again.
  3. Price returns to 3 dollars – You suppress all forms of ego to buy and consumer your dish.  You will continue to eat there even if the price fluctutes a little from time to time, depending on the situation. 

After all this, do you really know the actual value (not price) of chicken rice?  The reality is that you don’t.  Price changes, but the true value (or intrinsic value) remains rather constant.  Hence, there is always some general idea or feeling to tell if things are over priced, or under-priced, in relation to the actual value of the product.  The absolute value has too many variable affecting it and would be futile to try and find it.  By this, if the price is too far from the value, you should be able to detect it easily.

So what does this have to do with stock skills?  The main point is, we should never try and use all the prescribed methods/tools recommended by experts to determine the absolute true value of any stock prior to purchase.  Rather, these tools and methods should be used to tell us the general valuation range of a stock.  Then we can compare the current prices of stocks to tell if a stock is under-priced or over priced at any given point of time.

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