A Bird's Eye View or a Worm's Eye View? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


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

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get our special report, Secret to Increasing Your Trading Profits Today Now!
We will never sell or rent your email id.
Please read our Terms