When you buy a stock you buy part of a company? Understanding the valuation of a company is a complex matter. The factors that go into valuation are listed here. But, I would like to caution here that this list is very broad and is aimed to give you the idea of the complexity of the issue:
- Assets and liabilities
- Brand value
- The reputation of the management team
- The value system of the company
- Current and past demand for the goods and services that it offers
- Projections of demand in the future. This is influenced by domestic, sectoral and global factors
- The companies HR and management practices and its ability to attract quality talent
You would notice that the variables that influence valuation are both tangible and intangible. Pricing and arriving at the valuation of the company therefore will therefore not be simple.
If valuations calculated and presented in the form of various types of multiples will be the guide for investing then you are more likely to go wrong. No wonder most investors and investment managers are proven to be wrong each time there is a major crisis in the world. Investors suffer huge losses but we tend to forget and move on.
But the fundamentals explained above are irrespective of the time – they are as valid during corona virus-induced depression times or boom times post the last financial crisis.
Investing is an art and not a science. Just like there are few top artists there are few top-notch investors.