Not having the confidence that they know the true worth of their stocks, is one of the most common laments expressed by many individual investors. Even more importantly, knowing the price of all their stocks, but not knowing their value, is often a major source of shareholder losses. As a result, investors often buy when they should sell, and sell when they should buy.

Making matters even worse is the reality that there is no precise or absolute calculation of intrinsic value or what we like to call true worth. This stems from the fluid nature of a business where future prospects can rapidly change. Think financial stocks in late , going into and Once apparently very healthy and profitable enterprises, the fortunes of many financials collapsed with a vengeance. On the other hand, as frightening as this is, it is very rare to see the fortunes of a company or industry change so dramatically and as fast as we saw with the financial industry.

But clearly it can happen, which makes a strong case for diversification. In other words, where earnings went, stock price followed, and even more importantly, whenever price deviated, over or under, from fair value the orange earnings justified valuation line in the graph , it quickly came back into alignment. But obviously, although the price adjusting to earnings in and was rational, it was horrific at the same time. Nevertheless, the principles of valuation held true in this example and will be elaborated on later in this article.

As we stated earlier, there is no absolute or perfectly precise calculation of fair value. However, that does not mean that attempting to determine fair value is an impossible exercise.

Quite the contrary, the prudent investor can, easier than many people believe, calculate a reasonable range of fair valuation that they can use to make sound and smart long-term investing decisions. The only reason that fair value cannot be calculated with absolute precision is because part of the calculation must be based on estimates relating to future time.

Instead, future earnings estimates only need to be good enough to make a decision that is economically sound. Because, the rational and intelligent investor also realizes that since Mr. Market often behaves irrationally, that perfect tops or bottoms are rarely achieved except by chance. Therefore, instead of seeking perfection, investors must accept a reasonable range of probabilities that offers a high potential for success.

But perhaps the most important aspect of fair valuation is that it is only one component, albeit a very important component, for determining your long-term potential return from owning a common stock. The second important component is the rate of change growth rate of the earnings of the respective company you are analyzing.

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This leads me to another important refinement that adds insight to the relevance and importance of valuation. True worth, intrinsic value or fair value, no matter what you choose to call it, all refer to the same concept. The notion that fair value is a present time metric is based on the following, and often misunderstood relevance of fair value, as it applies to making a sound investing decision.

From this perspective, fair value depicts the current earnings yield that the investor is receiving on their capital. Put another way, this is more or less the average earnings yield for the average publicly-traded company.

In both examples, the current fair value PE ratio of 15 applies regarding making a sound current investment decision. However, the rate of change of earnings growth will have a material impact on future earnings power, and therefore, future long-term return potential.

With this fast growing company, we only have to look back to calendar year to illustrate fair value as one component of return versus rate of change of earnings growth as our second component.

In other words, this represented a sound valuation to pay for this above-average growing company. However, thanks to the power of compounding, and utilizing the Rule of 72, we are purchasing a stock whose earnings are doubling approximately every five years. Therefore, although we are buying current earnings at fair value, we are buying 5-year future earnings at a bargain PE ratio of approximately 7.

At this rate of earnings growth, again using the Rule of 72, it takes approximately 24 years for this company to double its earnings.

How to Calculate Fair Market Value | anajevopule.web.fc2.com

Unfortunately, our graphing tool only offers data going back approximately 21 years to , nevertheless, we can. Developed by ValueWalk Team.

Fair Market Value of Stock

By ChuckCarnevale on October 27, 7: Share Tweet Post Flip. Send us your tips at tips at valuewalk. Latest News From ValueWalk The Jeff Bezos Empire In One Giant Chart.