Calculate Fair Price of Share?
Couple of day’s back I got a very interesting question in my inbox from Usman a reader of eBook and blog and he asked
I am thankful to you for contacting with me efficiently,dear sir I specially request that can you help me in calculating the fair price of a share
Now first I would like to clarify that there is nothing called fair price of stock. If something is traded at price X that is actually the fair price for that stock. I know and I have my own article on DCF Method to Calculate Fair Price of Share but remember its a method based on lots of assumption of past performance but does not take much into account future news. So there is nothing on earth which can help you calculate fair share price but yes there are many theoretical algorithms which are being used to guess the fair value of equities. Remember if the above formula suggests some value as fair market does not work that way. After all its share market which does not move on maths but on sentiments and predictions. So don’t be fooled if someone or some algorithm suggests you some number as the fair price of stocks.
So now I would like to ask if you have any fair price calculator that you use. If you use it share with us in comments below.
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Very interesting post,thanks for sharing with us.
HOW TO CALCULATE THE FAIR VALUE OF THE SCRIP ACCORDUING TO P/E AND EPS AND MARKET CAPITAL
I generally use the following formula for the maximum price that i will pay for a share –
square root of book value x eps x 22.5
This actually take into account Graham’s number.
Thats my stratergy.
That would mean TTK prestige (One of my recent fav stock) will be priced at 13k+
You probably missed the square root.
TTK PRESTIGE
book value – 107.77
EPS – 58.25
So multiplying bv x eps – 62777.60
This is multipled by 22.5 – 141246.05
This number is square rooted and you get 375.8
so i will not pay anything more t han 375 for the share.
There is no margin of safety for me and i think the stock is over valued which is reflected in the pe ratio of 25.
so what do you think.
No I did not miss the root but I square rooted only the bookvalue.
You probably missed the square rooting thing.
TTK Prestige
Book Value – 107.77
EPS – 58.25
Multiply BV x EPS = 6277.60
Multiply the answer with 22.5 – 141246.05
This number has be square rooted – and you get 375
That, for me, is the fair value of the stock. Does not mean that it will not make a profit for you, but it just does not have a margin of safety for my liking.
This high premium is reflected in the high pe ratio of 25 for this stock.
So that is the difference between Growth and Value investing.
I follow this method for my long term investing.
Some others follow the maximum price for a share by just simply multiplying the EPS by 10 – For TTK it would be 582.
Both do give us a margin of safety for long term investing and hopefully give us multibaggers in coming decades.
Market trading at 20 times EPS and if you are looking at stocks at 10 times EPS you will definitely find good value stock but I have a different issue in those stocks. Why they have been not performing when other things are just double of what they are at. I am more of a trader kind of investor.
I have never tried my hand at trading. I am little put off by the fact that 98% of retail traders lose money in stock markets in the long run.
Most of the really rich investors have followed value investing.
Even Rakesh Jhunjhunwala, even though he trades too, has invested in a lot of companies before they have made it big and held them for “eternity”. The bulk of his money is from investing in value companies before they make big.
On the other hand, it is really difficult to see your stock sitting with one percent gain when the stock market has shot up 10%.
So dont really know what to follow.
I hope those writing the value investing books know what they are talking about.
i have opened acc. with sharekahn.its charges are 7 paisa for intrady & 40 paisa for delivery(both side).please tell me how to calculate brokerage & one example on at what price my profit starts on particular share in intraday/delevery.
help required,
regards
prashant
Prashant See http://shabbir.in/calculating-brokerage-on-the-fly/