Just how to people wanting investment incomes -- and everybody else -- decide what price for a stock is a bargain?
Most Investors Think Only of Growth
Experts answer this in different ways. What most people do is simply take it on faith the company will "grow."
Someday in the (hopefully) near future, it will make more money, own more assets, sell more products, have a larger market share -- and that all those things cause its stock market price to be higher.
Others Hope for a Greater Fool to Come Along
In some cases, people believe that there will always be a "greater fool" -- that is, someone who will buy the stock at a higher price even though it may not even be worth what they just paid for it. This is especially true during bull market booms such as the late 1990s.
Value Investing Seems to Make More Sense
Other experts -- called "value" or "contrarian" investors -- believe there is some dependable way to value a company's stock, usually based on the Price/Earnings ratio, or P/E ratio. If the actual market price is below the analyst's valuation, it's undervalued, and therefore a buy.
If the actual market price matches the valuation, it's fairly priced and therefore not worth buying.
If the actual market price is higher than the valuation, it's overvalued. Therefore it's a sell.
Value investors believe that sooner or later, the market will move to support their valuation. Therefore, undervalued stocks will go up to fair valuation, and overvalued stocks will go down to fair valuation.
The problem with these kinds of analysis is that there is no proven formula for determining the "fair" market price of a stock. There are many such formulas, but nobody agrees on them. And none of them have a perfect track record.
Sometimes "value" stocks do not go up in price. Sometimes the company goes out of business.
And if you buy a stock today that's undervalued, just when will it go up to full value?
Next week? Next year? 2029? Nobody knows.
And just how long are you willing to wait?
Are You Really Smarter Than Everybody Else? Really?
The other problem is that when you made these kinds of evaluations, you're in effect saying you're smarter than everybody else in the marketplace.
You may be Joe Ordinary Investor studying stocks in the evenings and weekends, but you're smarter than those Ph.Ds who are studying stocks twenty hours a day. You're smarter than the programs they've programmed.
Maybe you are that smart, but the rest of us are not. At least, I'm not. I didn't like coming to terms with that, but I finally decided the smartest thing I could was to admit my limitations, and find a way to work around them.
I advise everyone seeking investment incomes to acknowledge they cannot predict stock market or company stocks.
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