What is a fair value?

Transcript

Welcome to lesson one. Before we touch the tool, one idea that everything else builds on: the price of a stock and the value of the business are two different things.

The price is what people pay today. It moves every minute, with news, moods and fear. The value is what the business earns over the years: its profits, its cash flow, its growth. That moves slowly.

A fair value is an estimate of that value, expressed per share, so you can compare it with the price. If the price sits below the fair value, the stock may be undervalued. If it sits above, you are paying for expectations.

Nobody can calculate value exactly, so we don't rely on one formula. We run twenty-six models, from discounted cash flow to dividend models to multiples, and blend them, weighted by how much evidence each one has.

Cheap alone is not enough. A stock can be cheap because the business is in trouble. That is why every fair value comes with a quality score: thirty-seven factors about profitability, financial strength and growth, summed up in one number.

So the question is never just 'is it cheap', but 'is it a good business at a good price'. Keep those two together, and you already think like a value investor. In the next lesson we look up your first stock.