Waching daily Jan 31 2018

How do you determine whether a stock is undervalued or overvalued?

Today we'll talk about

the simplest way.

Today, the topic is about

the simplest way to know whether a stock is undervalued.

There are actually many ways .

Let's start with the simplest way.

I would like to use analogies.

Let's introduce this guy to you call "Ashton",

So imagine that Ashton has a house

which is worth $1.5 million.

and he also have cash worth $500,000 in the bank.

This will form his assets.

at the same time, he didn't fully pay for his house

using all his cash.

He took some Bank Loan

and there's outstanding amount of another $500,000.

So that forms the liability for Ashton,

in this case.

Usually people ask

what's the 'networth' right?

So 'Networth' essentially is

having the assets minus the liability

that will give you, in Ashton's case, $1.5 million

because 1.5 + 0.5 = 2 million

and - 0.5 million of mortgage

that's $1.5 Million networth.

And imagine that

Ashton is for sale, hypothetically...

in the market and he's priced

at $1 million.

So you can actually buy him

and own his assets

and of course his liabilities.

Everything as a package for $1 million.

In that case, if you know that

he is worth $1.5 million,

and you only paying $1 million.

So we can simply say that

Ashton is actually priced in an undervalued kind of way.

So, stocks can also be seen as

using assets and liability to assess

the networth of a stock.

We DONT use net worth to

to determine whether a stock is undervalued,

We call it "Book value".

It's actually the accounting method to determine

whether

how much the company is worth.

So, it's known as Book value.

So what's essentially the simplest way,

is to determine whether

the price is below the book value of the company.

The share price whether it is below the book value of the company.

So if let's say you use this ratio

called the "PB ratio" or" price to book value" ratio,

if let's say this ratio is less than 1,

essentially it's saying that the price is LESS than the book value

okay?

and this is a most simplest way to determine

whether a stock is undervalued or not.

And of course,

stocks that passes this criteria,

tend to have problems

that's aligned with them.

Why would a stock be undervalued,

If it's good stock,

it's unlikely be undervalued right?

It should not be selling below its networth.

Especially growth stocks,

which investors expect that

the company's worth more in the future, than what it is currently now.

So, investors are willing to pay

more than what this current worth is.

Which means good stocks tend not to be

below price to book ratio.

So, likely stocks that passes this kind of criteria,

tend to have problems.

They may be in unsexy businesses,

or they may even be in sunset industry

and they may even incur certain losses over the years,

and they may be smaller companies,

or even bad management.

So there are tons of problems

that associated with this kind of undervalued stocks.

And generally investors tend to shun them

because they don't like the problems associated with

these companies.

But that said right.

researchers have done a study

that if you buy very cheap stocks,

which are very low price to book stocks,

your returns are actually higher,

regardless of all the problems that persist in these companies.

So for example,

one study that they have done

was that bottom 10% price to book ratio,

that means the cheapest 10%

versus the top 10% by price to book ratio,

that means your most expensive stocks by

price to book ratio.

So when they compared the returns over several years,

they found that,

on the average,

if you have bought the cheapest stocks

by the lowest price to book ratio,

you'll gain 1.6% returns per month

as compared to

if you have bought the most expensive,

you only give 0.6% per month.

So it's almost 3 X more returns.

If you have bought

the cheapest stocks by the price-to-book ratio itself.

So I hope through today's session,

you have learnt how to determine,

the simplest way to determine whether a stock is undervalued,

and historically, based on research,

it's also proven that such stocks deliver high returns.

So as a matter of fact,

do not be concerned about some of the problems

that you may face, when looking at these companies.

Some of them may not be permanent issues

like losses can be temporal.

so which means there are opportunities for you

to find this undervalued stocks,

and gain much higher returns over the long run.

So I hope today is a good lesson for you guys

and that you can use it for your own investment.

For more infomation >> How To Tell If A Stock Is Undervalued? - Duration: 5:11.

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