Valuation Cheat Sheet
What are some of your favourite metrics?
1. How to think about valuation
All intelligent investing is value investing: you try to buy stocks for less than what they're worth.
Here are some valuation ratios you can use:
P/E ratio: stock price / earnings per share
EY (Earnings yield): earnings per share / stock price
P/B ratio: stock price / book value
PEG ratio: P/E ratio / yearly EPS growth
FCF yield: free cash flow per share / stock price
2. Always buy stocks at a discount
When you go to the mall, you like to buy your favourite products on sale.
The same goes for stocks. You want to buy a stock at its cheapest possible price and valuation.
The beautiful thing about the stock market is that Mr. Market often acts as a Manic-Depressive. You can use this volatility to your advantage by buying when there's blood running through the streets.
3. Short term versus long term
Over a one-year period, most stock price fluctuations are driven by changes in valuation.
versus
In the long run, stock prices are driven by the evolution of the intrinsic value of a company.
This means that in the short term the valuation you pay for a company is very important while in the long term the rate at which a company can grow its earnings per share is the crucial factor.
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