What's the fair Value?
Fair value, or the intrinsic value of a stock, is the value of a stock derived from the key stats of companies and their reports. This value is used for comparison with the current market price. So it can be assessed whether the stock is currently cheap or expensive.
In this article we would like to introduce you to the concept and meaning of Fair Value. Here you can also find out how to calculate the fair value of a stock.
At the end of the article, we'll talk about the inventors of Fair Value, Benjamin Graham and Warren Buffett.
WHAT DOES THE TERM "FAIR VALUE" MEAN?
What does Fair Value actually mean? Value strategies try to find out the true value of companies and their stocks. There are several approaches how to determine this value. The goal of value strategies is to invest in companies that are worth more than they cost, and therefore have a higher value than they currently cost on the stock market.
In the fair value calculator approach, the fair value of shares is determined by a combination of profit and growth. Because what matters at the end of the day is how much money a company makes and how much it grows to make even more money.
To calculate this value, enter the earning per share, ie the earnings per share and the percentage of sales growth in the calculator of the fair value calculator. You get a true value to the calculated stock and afterwards you can invest in stocks that are actually worth more than these just cost.
In a long-term investment strategy you can observe that stocks are slowly approaching their true value.
INVESTMENT HORIZON IN THE FAIR VALUE CALCULATOR METHOD
Investment horizon for a fair value strategy: It can take a long time for a stock to reach its true value. This strategy is only suitable for investors with a long investment horizon. A long investment horizon means years and decades. However, this patience is usually rewarded.
WHY YOU SHOULD KNOW THE FAIR VALUE OF SHARES
But why calculate the fair value of stocks? The investment philosophy pursued by the Fairvalue project assumes that the financial markets are not efficient. This means that the financial markets do not always reflect the true value of shareholdings.
The job of any investor should therefore be to break the holdings down to their true value and then invest only in stocks whose true value is higher than the current market price. On our website fairvalue-calculator.com, consisting of the Free Fairvalue Calculator and the Premium Database, you can easily find out a stocks true value. All you have to do now is to invest in stocks whose true calculated value is higher than the current stock market price.
After a rather long holding period and a modern asset allocation, the stock market price should approach the true value. This is shown by examinations and our studies and backtests. Since most valuation models for stock fair values, ie the true value of the stock, are very complicated and are not suitable for the stock market beginners, the fair value method is limited to as few inputs as possible with the greatest possible significance.
THE INVENTORS OF THE FAIR VALUE BENJAMIN GRAHAM AND WARREN BUFFETT
Benjamin Graham is considered the father of the fundamental analysis of stocks and introduced the term value investing. As a teacher to Warren Buffett, value strategies received a lot of attention. After all, Warren Buffett was able to make a fortune over $ 80 billion using Graham's strategies.
Benjamin Graham (1894-1976) was a an American economist and investor. Graham was a master of stock analysis and had the ability to analyze companies down to their smallest detail. At Columbia University, Graham teaches Buffett everything about value investing. A study that should later pay off for Warren Buffett.
In 1926 Graham founded together with broker Jerome Newman the Graham Newman Corp, which implemented the investment philosophy of Graham.
In 1929, the big stock market crash did not spare Graham and Newman. However, a 70% loss did not prevent Graham from buying more stocks. From 1936 to 1956, the Graham-Newman Corp. a return of 15% annually. This is still considered one of the best performances in stock market history.
In 1934, Graham wrote his most famous book "The Intelligent Investor". In this book, he explains in detail his strategy on how to invest only in stocks that are traded below their fundamental value.
This book was read by Warren Buffett at the age of 19 and has changed his life.
Warren Buffett (born 30 August 1930) is a US investor. Warren Buffett earned his first money by selling Coca Cola in the summer of 1936 at the age of only six years. He bought Coca-Cola six-packs for 25 cents each and sold the single bottles for 5 cents each. Later he worked as in newspaper delivery and rent pinball machines. At the age of 17, he bought a Rolls-Royce with friends and rents it for $ 25 daily.
In 1951 he received the Master of Economics at the University of Columbia, where he met his teacher Benjamin Graham. From that point on, Warren Buffett's generated an average annual return of 20% on the stock market, using Graham's strategies. This ability earned him the nickname "Oracle of Omaha."
Warren Buffett founded the Buffett Partnership at the age of 25. Here relatives entrusted him with a total of $ 105,000. From 1956 to 1969, Warren Buffett was able to achieve a 30% annual return on this investment pool.
In 1969, Buffett founded the Berkshire Hathaway, which made strong profits until today and ranks among the most expensive stocks in the world.
We learned from the best of the best
Based on the investment strategies of Graham and Buffett, we developed the Fair Value Calculator methodology. With this online tool, the fair value method becomes accessible to beginners and newbies in the stock market. The goal of fairvalue-calculator.com is the quick learning of the strategy and the simple application to achieve an exceptionally good return in the stock market.