Chapter 2

“Price is what you pay. Value is what you get.” The sentence sounds simple, but it is the line between real investing and emotional guessing. On the stock market you are surrounded by prices all day long. Numbers flashing, charts jumping, headlines screaming. Because that is so present, many people almost automatically assume that the share price is the truth about a company. It is not. The price is only the last transaction between two people who happened to disagree at that moment. Nothing more.

The absurd thing is that in real life we would never buy this way. No one buys a house just because it is eight percent more expensive today than it was yesterday. No one buys a car just because the salesman is shouting louder. In stocks we do exactly that all the time, because the market keeps us in a constant state of motion. Movement feels like meaning. It is not.

That is why you need a rational point of reference. An anchor. A number, or at least a range, that tells you whether you are operating in a realistic area or paying for pure fantasy. Fair value is exactly that anchor. Not as a perfect number that represents absolute truth, but as an orientation that helps you separate price from value.

If you do not know the value, you are left with emotion as your main basis for decisions. Then you buy because you are afraid of missing out. You sell because you are afraid it could get even worse. You hold because you hope the stock will recover. Hope may feel warm, but on the stock market it leaves you out in the cold.

The Fairvalue Calculator does something very simple. It forces you to pause for a moment before you buy and ask yourself a clear question. Is this company attractive at this price or not. And what would have to happen for this price to be fair. If you take that question seriously even once, you start to become calmer. You no longer chase every twitch on a chart. Price movements stop feeling like commands and start looking like offers.

Now we get to the practical part. Many people act as if valuation were something only analysts with endless Excel sheets can do. That is nonsense. You do not need thirty ratios to understand the direction. You need a simple entry point. That is why there is the manual fair value calculator as an extremely simple version that uses only two inputs, earnings per share and growth.

Earnings per share is simply profit per share. To start with, the last reported earnings per share is enough. If you want to be more precise, you use diluted earnings per share, because that is usually more realistic. Growth is basically the question of how fast the company is growing. In the simple version you can approximate that with revenue growth. If revenue has grown by ten percent compared to the previous year, you can work with ten percent growth as a rough first estimate.

The nice thing is that this immediately gives you a feeling for the relationships. At the same time you notice another important truth. Earnings and growth do not behave politely like examples in a schoolbook. A company can grow strongly but show little profit in the current year. Another company can report very high profits but hardly grow at all. If you plug these two numbers into a formula without thinking, the picture can be distorted. Not because the method is wrong, but because two numbers can only ever describe reality roughly. The point is not to simulate a perfect world. The point is to give you a rational starting point instead of investing by gut feeling.

Here comes a rule that I phrase deliberately hard, because it prevents a lot of damage. If you feed unrealistic values into your calculation, you stop being an investor and turn into a speculator. That is it. This is why there are boundaries you should respect. For earnings per share it makes no sense to type in fantasy numbers that almost never occur in real life. You might feel good for a moment because the output looks nicer, but you are building yourself a fairy tale. Fairy tales are fine at bedtime, but not in your portfolio.

The same applies to growth. Growth is not a wish list. A company can have an exceptionally good year, of course, but if you permanently assume fantastic growth rates you are not buying companies any more, you are buying hope. This is exactly why fair value thinking is so helpful. It brings you back to the ground. You move from “I am sure this will work somehow” to “I check whether this is realistic”.

Once you understand this foundation, something interesting happens. You automatically start to see the market for what it really is. A virtual world of values in which prices often deviate significantly from reality. Sometimes that even happens collectively. There are phases in which the entire market is expensive. Not just a little, but clearly. In those phases fair value is not just a nice extra, it is more like a seat belt.

Why. Because an expensive market can continue to climb for months or even years. That is the nasty part. When everything is running hot, reason suddenly feels like a mistake. You watch others making money and ask yourself whether you are the only one who finds this strange. That is when people tend to do exactly what they should not do. They become brave late and panic early. They buy at the top and sell at the bottom. The classic pattern.

That is why it is so important not only to value individual stocks, but also to classify the market as a whole. If you know the market is overheated, you automatically become more cautious. You become more selective. You become more patient. You are not looking for “some stock”. You are looking specifically for situations where the inner value is clearly above the price. After a crisis that becomes easier again. After crises everything suddenly looks like a clearance sale. Before crises everyone suddenly looks like a genius. That is why it never hurts to keep some cash on the sidelines. How much can be guided by the Fairvalue Calculator through the market analysis.

Now we come to a sentence many people do not like because it sounds so unexciting, even though it is true. The best time to start investing for the long term is always now. Not because the market is necessarily cheap today, but because you need time. Time is the factor that smooths volatility for you. You do not want to wait until you feel completely safe, because by then most of the move is usually already behind you. The only point is this. If the market is expensive, you do not jump in blindly. You go in with a structure. You do not buy everything, you buy the right things. Or you build your positions gradually and keep some dry powder instead of overloading yourself at once.

That brings us back to fair value. Fair value is not there to identify the exact bottom. It is there to give you a logic you can explain, a way to see when a stock is trading in a range that makes sense. Undervalued, fairly valued or overvalued. These three zones are like road signs. You can ignore them, but sooner or later you will understand why they exist.

In the following chapters we build on this. We move from “price versus value” to a clear procedure. How you estimate the numbers more accurately, how you smooth outliers, how you avoid being fooled by single ratios and how you turn a fair value idea into a system that actually works in everyday life.