Hello, I was watching some finance lessons and I'm confused about the valuation aspect. If I make assumptions about the discount rate and value a company as being a going concern, whether perpetuity or finite annuity, the value that I come up with is something that I believe would be the actual value of a company depending upon which its stock is either overvalued or undervalued.
So is the underlying assumption of my valuation that the market will finally realize its mistake over time and the price will converge to the stock's actual value that I came up with over time?
If it does converge, how would we calculate how much it converges because obviously it can't be an exact convergence since it would mean the market has become efficient somehow even though it wasn't before.
And even if I get a valuation that might work, there are numerous external factors that can always affect profits for particular periods which would distort my valuation numbers.
So is financial valuation really all that important as people make it? Because it seems to me that an intuitive understanding is much more important compared to quantitative analyses. What am I missing?
Based on the most helpful WSO content, here are some insights regarding your questions on company valuation:
Market Realization of True Value:
Calculating Convergence:
External Factors Affecting Valuation:
Importance of Financial Valuation:
Qualitative vs. Quantitative Analysis:
For further reading on thinking like an investor and understanding the nuances of valuation, you can refer to the detailed discussion in the WSO forum: https://www.wallstreetoasis.com/forum/asset-management/thinking-like-an…</a">Thinking Like an Investor.
This approach ensures a comprehensive understanding of the investment landscape and helps in making informed decisions.
Sources: Is the common view of financial risk completely wrong?, Q&A: Quantitative Analyst - Machine Learning, Analytics, & Quantitative Research/Investing, VC's Rebuttal to Uber's Valuation, Thinking Like an Investor, On the Job With Simple As… My Research Process
Also read up on and consider the Margin of Safety.
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