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Stocks- No Such Thing as Overvalued

02 Mar

With all these tech companies going public (LinkedIn, Pandora, Yelp ect.) I’ve been hearing the term “overvalued” a lot lately, but what does that term really mean? When someone says a stock is overvalued it’s important to keep in mind it’s just a matter of opinion. People say beauty is in the eye of the beholder. I would say value is in the eye of the beholder.  If you’ve ever watched the TV show Pawn Stars you’ll see continuous examples of this. A customer goes to the pawn shop to sell their grandmother’s shoelaces that are supposedly worth $1000. When Chum (a character from Pawn Stars) only offers them $5 they get offended and leave. The customer is mad because Chum thinks the shoelaces are overvalued at $1000. The thing to keep in mind is Chum has no idea how much the shoelaces will actually sell for. An item’s value is different for everyone.  This is why valuation is one of the hardest subjects to master.

How do we figure out the price on something if its value is different for everyone? Well, generally we go off its market value. It makes sense to me that market value is equal to the intrinsic value (real value plus outlying factors). An example of this is Yelp’s IPO. The real values of Yelp’s shares were evaluated at $15/share, but as soon as the markets opened the price shot up over 60% and closed at $24.58! This happened because the real value ($15) met with the outlying factors ($9.58) to create the market value ($24.58). I think it’s overpriced, considering they have never posted a profit, but just because I don’t see the value of the outlying factors doesn’t mean they aren’t there. That’s why I hate when people give specific stock picks. They have no clue what a stock is actually going to do. That’s why I think it’s better for people to use their own gut instincts when it comes to buying individual stocks. You might be in tune with some outlying factors that others aren’t.

If someone says a company is overvalued it means that they don’t see what the rest of the market see at that point in time. The real value and the value of the outlying factors are continuously changing. This means the stock’s intrinsic value  is always shifting. There is no way of actually knowing if a stock is overvalued, because it’s impossible know the future of its intrinsic value. There are so many outlying factors at work it’s incomprehensible to know them all. The only way you can even get close to knowing is if you are completely in tune with not only the company, but people’s perception of the company and their products. Anything short of that is pure speculation.

That being said, does anyone else feel like speculation is all we have left when it comes to investing in individual stocks?

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Posted by on March 2, 2012 in Uncategorized

 

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