Stock valuation metrics and how to value a stock

I don't know much about stocks. I've read some books about traders (Den of Thieves, for example), and I understand the rudiments of the stock market itself, but I don't know anything about the language of stocks. I don't know anything about the nitty-gritty. I can vaguely describe a P/E ratio, but that's about it.

Obviously, I'd like to learn more. I have several books on my shelf, begging me to read them. What I really need is a bare-bones introduction to the subject.

Michael Fischer, the man behind the Saving and Investing videos I promote from time-to-time, has begun work on a new series specifically about stock valuation which I hope can give me a basic understanding of the vocabulary of stocks. Here are some of his introductory remarks on valuation:

 

Fischer says:

The purpose of this section on valuation is much more to demystify some of the terminology and to highlight some of the methods that are used by analysts and portfolio managers and market professionals to determine the value of stocks, and also to demystify the terms that are so commonly used in the financial press…[These videoas are not meant] to encourage people to conduct valuation of individual securities themselves, or to use these methods to make decisions…

I haven't had time to watch all of these yet, but I'd like to point them out in case you're interested in learning, too:

In his introduction to valuation, Fischer says:

When we talk about valuation, we're talking about trying to derive what the value of a particular security [i.e. stock] might be using different methods. All of the methods have advantages and disadvantages — some are more difficult to calculate, and some more easy.

[…]

In general, when we think about buying anything, whether it's a piece of art or furniture, we're typically comparing the benefits that item might provide, how they compare to the cost of that item, or how they compare to benefits that other items might provide at a similar cost. We can ultimately make an informed assessment whether those future benefits outweigh the cost of that item today.

After watching two videos from this new series, I think it's important to first be familiar with some fundamental terminology. A good way to do this is to watch Fischers's first series of videos on saving and investing.

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Writer's Coin
Writer's Coin
12 years ago

Seriously? I think what this guy is trying to do is great. But I can’t get through one of those videos. Too boring. How many beginners are going to sit through that?

J.D.
J.D.
12 years ago

🙂 I know the videos are kind of dry, but I like them! I love how Michael seems to be concentrating to “dumb down” the material. He obviously knows so much about the topic, that explaining the basics is difficult. It’s like when somebody asks me about blogging, and I have to force myself to stick to just the fundamentals. But I know what you mean. While I was writing this up, I was thinking it would be great to have a high-quality animated version of this using a professional narrator and Michael’s script. Ah, if only I had the… Read more »

Amy
Amy
12 years ago

If you have the time, consider taking an investment class at the local community college. I am taking one right now towards the CFP designation, and it breaks down many things I’ve heard but never understood.

Of course, you could always just get a textbook and read through, but get the right teacher and it makes it much better!

I still don’t plan on investing in individual stocks, but it’s a great start to understanding the general landscape.

Ron@TheWisdomJournal
12 years ago

Hey JD, you might re-visit Phil Town’s book Rule #1.

Warren
Warren
12 years ago

I think this entry is pretty important for twenty somethings to understand. Compound interest works great, but to really capitalize when you’re young, you need to be able to have a feel about looking at stocks.

Laura H
Laura H
12 years ago

Sigh. I wish that there were transcriptions available for videos like this.

Writer's Coin
Writer's Coin
12 years ago

At my work we’re building a social-networking site that is going to be aimed straight at novice investors and the idea is to do kind of what this is guy is doing in a way that will engage readers. In other words, making it simple but also entertaining. No small task but it’s going to be a lot of fun.

AJC @ 7million7years
AJC @ 7million7years
12 years ago

… if you want to learn how to TRULY value stocks then the absolute best book on the subject, by a country-mile, is Phil Town’s outstanding (and very simple to follow) “Rule 1 Investing”. AJC.

John Egan
John Egan
12 years ago

Most of the people on this site seem to be ‘buy and hold types’… Personally, I don’t believe it for too many reasons, however, if you are the type that really does not want to spend too much time thinking about your holdings and are value inclined, I can heartily suggest “Getting started in Value Investing” by Charles S Mizrahi. His book focuses on the “Warren Buffet” style of investing and he shows you how to find stocks that you should invest in, when to buy them and how to read a quarterly report. (OK.. That sounds boring…But it really… Read more »

rhbee
rhbee
12 years ago

I have mentioned it before, JD, serendipity do.
Just this morning I was sitting down to post about this very topic. We have a rule in dance teaching. It never hurts to review the basics. That is what good technique is all about.

Daniel
Daniel
12 years ago

I’m starting to doubt that stocks have any actual value. It all seems to be voodoo. For instance, Rockwell Automation announces that in 2Q 2008 their revenues rose 17% but because their profit margin dropped, their stock price went down($6/share and counting). Now, if I had a small business that grew 17% in three months, I would be thrilled but when a publicly traded company does it, major investors trip over themselves to dump the stock. Maybe I just don’t understand the complexities of a global corporation, but the company has increased revenues by $1.5 billion dollars over the past… Read more »

rhbee
rhbee
12 years ago

Daniel, It’s my understanding (though I am not a trader or expert) that it isn’t about the company it’s about the value that an investor can see in the stock of that company going up or down. When a company misses its expectation its stock price might go down but that is only a temporary state during which real investors will buy low so they can then sell high. Think about what happened with Bear Stearns. When it went to $2 on a Friday, the stock sold like hotcakes because everyone with market sense or inside info or government connections… Read more »

John Egan
John Egan
12 years ago

Daniel… Your confusion is perfectly understandable.. Aside from the comments above, I’d like to add that the market is a constantly changing animal. It is extremely emotion driven. Couple that with the types of traders in the market (amateurs, institutions, value investors and etc..) and it is very much like driving in San Diego (The variety of driving styles is mind-boggling.. Mexicans from across the border, school kids, guys in $200K Ferraris and 1980 Toyotas with a car-load of kids trying to keep up at 95+ mph, running on one of those ‘inflata-spares’… Amazing!) Each type of investor seems to… Read more »

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