X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
A Bird's Eye View or a Worm's Eye View? - Views on News from Equitymaster
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  
The Equitymaster Research Digest

A Bird's Eye View or a Worm's Eye View?
Oct 7, 2016

Here's a thumb rule for valuing real estate: Check what similar properties in the neighbourhood are going for. This will give you a good idea of what you should pay.

It's a good rule. When assets are more or less homogenous, comparable valuation makes sense. It's simple, quick, and quite reliable.

The key word though is homogenous. If the assets aren't homogenous, this thumb rule can lead you astray. Comparable valuations can be used in stock markets too.

In fact, in a field where asset structures can get extraordinarily complex, comparable valuations come in quite handy. Want to value a company in an industry? Simply check what similar companies are trading at and you get a good idea whether your company is under or overvalued.

The View Below the Surface

Except with stocks, it's not as simple as it seems. There are subtle differences that lurk under the rather placid surface of seeming homogeneity. Forget different industries, two stocks from even the same industry can have non-homogeneous business models.

Take the metal industry. Here, one company can be fully backward integrated. It can own its own mines and captive power plants. But another firm may lack all of this. In such cases, comparative valuations make no sense.

To Read the Full Story, Subscribe or Sign In


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS