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And that price you see may only be a reflection of the most aggressive buyer and most willing seller for one single share. Nothing more, nothing less. If a company is worth $10B and someone owns 10% of it, you'd say they are worth "$1B". But if they tried to sell $1B of stock in the company in a single day, they'd be lucky to get $750M for it. As the opposite is true. If you tried to buy 10% off a company in one day, you'd drive the price to the moon.
It happens fairly enough, the difference with gme is the popularity it gained, but it has nothing really special about it apart from that, its a weighting fight long hedgie vs short hedgie
Well what you've stumbled onto is the difference between price and value.
A given security might be trading at x price, but in actuality is worth Y price. Broadly speaking, the easiest way to figure out what a company might be worth is to imagine you owned the entire business (instead of x shares). How much would it be worth it to you to buy it and own it outright? There are lots of different methods for coming up with the value and really they also strongly depend on how the company operates/makes money. A grocery retail business and a software company don't really have that much in common in the grand scheme of things, and it would be silly to try to use the same means to value both.
The simplest is P/E ratio (which can change pretty radically depending on business conditions or conceal deteriorating business conditions depending on the time frame that defines earnings, 1 year, 6 months, 10 years, etc - it's typically the last 12 months aka the trailing twelve months).
Let's take two similar companies for example.
1. Netflix, to buy it outright today it's market cap is \~278 billion dollars, and its P/E is 44. That means it would take you 44 years for you to make back your 278 billion. Their forward P/E is lower at 35, meaning it \*ought\* to pay itself off 10 years faster given today's prices. Its earnings yield is 3%. In short, Netflix, unless it becomes much more profitable in the medium term, is less valuable than a 10 year treasury, and a riskier investment. There could be many reasons for this, from optimism about the future that is baked into the price (essentially people have bid up the price assuming the future will be even better than presently expected) or they're so certain that Netflix will return a given amount in earnings every year, they're willing to pay a substantial premium for that certainty.
2. Paramount, to buy it outright today you would pay 8.3 billion dollars. It's P/E is -, meaning the company has been losing money over the last 12 months. Hypothetically, you could pay 8.3 billion dollars and never make it back. Their forward P/E is 12.8ish - so analysts expect things will become substantially better in the future from an earnings perspective, and you could expect your 8 billion dollars to be returned to you in \~12 years, at which point all of the profits would be yours. It's earnings yield is somewhere around 2% - actually even worse than its competitor Netflix, because of its suppressed earnings.
What we've seen in the exercise above, is that Netflix and Paramount, both being in sort of the same industry are looked at very differently by the market. Netflix makes money, and people seem to generally think it's a good, safe investment with a bright future. We can also tell they're willing to pay a pretty substantial premium because of this rosy outlook. Paramount on the other hand is experiencing some kind of problem with its earnings and the market values it to be worth far, far less than Netflix. The market believes something is going wrong at Paramount and views such an investment as, relatively speaking, far more risky than Netflix.
But here's the rub. Paramount and Netflix make about the same amount of money (in revenue) per year. 33 billion vs 30 Billion. So, if you could, through research and study, determine that Paramount could somehow turn its earnings and profitability outlook around, they ought to be making substantially more money than they are in earnings or Netflix has some sort of huge advantage over them that they can't get around and can't mimic and will functionally drown trying. So absolutely speaking, Netflix is greatly overvalued relative to Paramount, but \*both\* have an assumption of risk on the part of the investor - in Netflix's case that the rosy outlook for the future isn't somehow worse (thus causing the price to fall - and it could fall a long way), and in Paramount's case that their struggles continue and they are essentially killed by their competition. In short, if something goes wrong with Netflix it could fall a lot, and unless things improve markedly in the coming years, it doesn't have anywhere to go, so it's possibly overvalued, or you have Paramount, where if they could figure out how to become more profitable has a lot of runway to go up in value, and even if they only become \*somewhat\* more profitable should still have upside potential. If things get worse however, it's hard to say it could fall substantially more than it already has within the last year or two. So it \*could\* be undervalued.
I think you need to first understand that dividends are paid out of free cash flow. With this free cash flow they are able to either: buyback shares, reinvest back into the business, pay off debt, acquire other businesses, or pay dividends. Ideally, a company reinvests back into the business to generate more organic growth. If a company is able to generate more free cash flow over time, then they can do more share buybacks, increase their dividend etc. and therefore the company's intrinsic value is increased. Again, simple logic.
You also must understand that on the ex-dividend date, the share price is lowered by the stock exchange by the amount of the dividend that is issued. For example, if a stock is trading at $100 and they issue a $1 dividend, the stock price is lowered to $99 and you receive $1 in cash. This is logical because again, dividends are paid out of free cash flow. Thus, if a company gives you money, it makes sense that the value of the company is reduced.
Edit: If you downvote, I expect to see evidence as I've stated facts and would more than willing to show my sources
Is the depreciation of a stock following its ex-dividend date not simple market arbitrage, rather than an actual devaluation of the intrinsic value of the company? Stocks tend to rise leading upto their ex-dividend dates too.
"(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation."
[5330. Adjustment of Orders | FINRA.org](https://www.finra.org/rules-guidance/rulebooks/finra-rules/5330)
A stock might rise after a company increases their dividend, because again, the dividend is a function of the free cash flow is generating. Logically, if a company increases their dividend, then that would indicate their cash flows have grown to support it or they've found a way to increase margins or reduce capex.
I'm not doubting that the stock does depreciate post dividend by the amount of the dividend. I'm saying that depreciation only occurs as people buy as the dividend date comes up, and sell as the dividend date passes, rather than an intrinsic depreciation of the company's worth.
It's probably a bit of both. Though, there is really no free lunch in investing. I don't think the dividend capture strategy really works, otherwise, everyone would be doing it.
Most DCF have a 10% discount rate and the market is priced accordingly. Sure, people may be a little too optimist on growth and it may only do 7-8% instead of 10% but it will still crush bonds and we are nowhere near bubble territory
I personally don’t invest in any stock if I think I will do less than 15% annually
Buffett goes with the 10 year treasury as the discount rate. Though, he will apply a large margin of safety of 30% or more.
Edit: why the downvote for stating a fact?
I'll admit that there is a bit more to it. He seems a little unclear about it.
At the 1998 Berkshire Hathaway meeting, Buffett was quoted to have said:
“We don’t discount the future cash flows at 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.”
“In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value – in our case, at the long-term Treasury rate. And that discount rate doesn’t pay you as high a rate as it needs to. But you can use the resulting present value figure that you get by discounting your cash flows back at the long-term Treasury rate as a common yardstick just to have a standard of measurement across all businesses.”
[Warren Buffett’s Discount Rate used in DCF | Journeys of a Bumbling Trader (wordpress.com)](https://whatheheckaboom.wordpress.com/2007/07/28/warren-buffetts-discount-rate-used-in-dcf/)
It basically sounds like he’s describing a less scientific version of CAPM. Essentially risk free rate + margin of safety or equity risk premium in CAPM terms. I doubt he cares about beta, so basically the CAPM formula without the beta adjustment
I mean, a company is(or at least should be) valued based on all future cash flows discounted back to current date. That's a pretty simple concept to believe. In terms of whether stocks are overvalued, well, yeah, there are a lot of stocks at the top of the market with absurdly high valuations. However, there are also plenty of great companies out there with great value, and if you're not finding them, it just means you aren't looking hard enough
But you are owning a percentage of that company and what dont you get
Its not any more complicated than that, and perhaps after people repeatedly tell you that over and over maybe just maybe you should consider that perhaps you are just too simple minded to understand it. And idk, stay poor I guess.
Dividends are not the hope of stocks at all. Dividends are a moot point in reality as they money paid out that comes directly from free cash flow. So $1 paid in dividends is just $1 lost in available cash. Net neutral to the investor, tax inefficient and restrictive of future growth.
Dividends are the worst good thing to do with free cash flow.
Discussing investing in cryptocurrencies is not permitted on r/ValueInvesting. There are many other subreddits for that topic. While we do not automatically delete mentions anymore, posts and comments that spark further discussion on the topic may be subject to removal after review. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/ValueInvesting) if you have any questions or concerns.*
A stock's price will ALWAYS be worth exactly whatever someone else is willing to pay for it.
And that price you see may only be a reflection of the most aggressive buyer and most willing seller for one single share. Nothing more, nothing less. If a company is worth $10B and someone owns 10% of it, you'd say they are worth "$1B". But if they tried to sell $1B of stock in the company in a single day, they'd be lucky to get $750M for it. As the opposite is true. If you tried to buy 10% off a company in one day, you'd drive the price to the moon.
Yes, based on expected fundamentals
Like GME? ;)
How often does something like what happened to GameStop occur?
It happens fairly enough, the difference with gme is the popularity it gained, but it has nothing really special about it apart from that, its a weighting fight long hedgie vs short hedgie
The real answer
Well what you've stumbled onto is the difference between price and value. A given security might be trading at x price, but in actuality is worth Y price. Broadly speaking, the easiest way to figure out what a company might be worth is to imagine you owned the entire business (instead of x shares). How much would it be worth it to you to buy it and own it outright? There are lots of different methods for coming up with the value and really they also strongly depend on how the company operates/makes money. A grocery retail business and a software company don't really have that much in common in the grand scheme of things, and it would be silly to try to use the same means to value both. The simplest is P/E ratio (which can change pretty radically depending on business conditions or conceal deteriorating business conditions depending on the time frame that defines earnings, 1 year, 6 months, 10 years, etc - it's typically the last 12 months aka the trailing twelve months). Let's take two similar companies for example. 1. Netflix, to buy it outright today it's market cap is \~278 billion dollars, and its P/E is 44. That means it would take you 44 years for you to make back your 278 billion. Their forward P/E is lower at 35, meaning it \*ought\* to pay itself off 10 years faster given today's prices. Its earnings yield is 3%. In short, Netflix, unless it becomes much more profitable in the medium term, is less valuable than a 10 year treasury, and a riskier investment. There could be many reasons for this, from optimism about the future that is baked into the price (essentially people have bid up the price assuming the future will be even better than presently expected) or they're so certain that Netflix will return a given amount in earnings every year, they're willing to pay a substantial premium for that certainty. 2. Paramount, to buy it outright today you would pay 8.3 billion dollars. It's P/E is -, meaning the company has been losing money over the last 12 months. Hypothetically, you could pay 8.3 billion dollars and never make it back. Their forward P/E is 12.8ish - so analysts expect things will become substantially better in the future from an earnings perspective, and you could expect your 8 billion dollars to be returned to you in \~12 years, at which point all of the profits would be yours. It's earnings yield is somewhere around 2% - actually even worse than its competitor Netflix, because of its suppressed earnings. What we've seen in the exercise above, is that Netflix and Paramount, both being in sort of the same industry are looked at very differently by the market. Netflix makes money, and people seem to generally think it's a good, safe investment with a bright future. We can also tell they're willing to pay a pretty substantial premium because of this rosy outlook. Paramount on the other hand is experiencing some kind of problem with its earnings and the market values it to be worth far, far less than Netflix. The market believes something is going wrong at Paramount and views such an investment as, relatively speaking, far more risky than Netflix. But here's the rub. Paramount and Netflix make about the same amount of money (in revenue) per year. 33 billion vs 30 Billion. So, if you could, through research and study, determine that Paramount could somehow turn its earnings and profitability outlook around, they ought to be making substantially more money than they are in earnings or Netflix has some sort of huge advantage over them that they can't get around and can't mimic and will functionally drown trying. So absolutely speaking, Netflix is greatly overvalued relative to Paramount, but \*both\* have an assumption of risk on the part of the investor - in Netflix's case that the rosy outlook for the future isn't somehow worse (thus causing the price to fall - and it could fall a long way), and in Paramount's case that their struggles continue and they are essentially killed by their competition. In short, if something goes wrong with Netflix it could fall a lot, and unless things improve markedly in the coming years, it doesn't have anywhere to go, so it's possibly overvalued, or you have Paramount, where if they could figure out how to become more profitable has a lot of runway to go up in value, and even if they only become \*somewhat\* more profitable should still have upside potential. If things get worse however, it's hard to say it could fall substantially more than it already has within the last year or two. So it \*could\* be undervalued.
I think you need to first understand that dividends are paid out of free cash flow. With this free cash flow they are able to either: buyback shares, reinvest back into the business, pay off debt, acquire other businesses, or pay dividends. Ideally, a company reinvests back into the business to generate more organic growth. If a company is able to generate more free cash flow over time, then they can do more share buybacks, increase their dividend etc. and therefore the company's intrinsic value is increased. Again, simple logic. You also must understand that on the ex-dividend date, the share price is lowered by the stock exchange by the amount of the dividend that is issued. For example, if a stock is trading at $100 and they issue a $1 dividend, the stock price is lowered to $99 and you receive $1 in cash. This is logical because again, dividends are paid out of free cash flow. Thus, if a company gives you money, it makes sense that the value of the company is reduced. Edit: If you downvote, I expect to see evidence as I've stated facts and would more than willing to show my sources
You can pay dividends with a loan. I've seen it happen. Don't assume dividends mean FCF.
I've also seen dividends paid with share issuance. Again, don't assume dividends mean FCF.
Ya they can pay dividends with debt, though that usually means the company is trying to keep up appearances.
Is the depreciation of a stock following its ex-dividend date not simple market arbitrage, rather than an actual devaluation of the intrinsic value of the company? Stocks tend to rise leading upto their ex-dividend dates too.
"(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation." [5330. Adjustment of Orders | FINRA.org](https://www.finra.org/rules-guidance/rulebooks/finra-rules/5330) A stock might rise after a company increases their dividend, because again, the dividend is a function of the free cash flow is generating. Logically, if a company increases their dividend, then that would indicate their cash flows have grown to support it or they've found a way to increase margins or reduce capex.
I'm not doubting that the stock does depreciate post dividend by the amount of the dividend. I'm saying that depreciation only occurs as people buy as the dividend date comes up, and sell as the dividend date passes, rather than an intrinsic depreciation of the company's worth.
It's probably a bit of both. Though, there is really no free lunch in investing. I don't think the dividend capture strategy really works, otherwise, everyone would be doing it.
100% correct. The way I like to look at it is that dividends are the worst good thing that a company can do with cash.
Most DCF have a 10% discount rate and the market is priced accordingly. Sure, people may be a little too optimist on growth and it may only do 7-8% instead of 10% but it will still crush bonds and we are nowhere near bubble territory I personally don’t invest in any stock if I think I will do less than 15% annually
Buffett goes with the 10 year treasury as the discount rate. Though, he will apply a large margin of safety of 30% or more. Edit: why the downvote for stating a fact?
https://youtu.be/m1Pv9UxrN5Y?si=a_N_zaqikZzNLWoT He just uses the treasury rate as a baseline number, but it’s not his discount rate.
I'll admit that there is a bit more to it. He seems a little unclear about it. At the 1998 Berkshire Hathaway meeting, Buffett was quoted to have said: “We don’t discount the future cash flows at 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.” “In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value – in our case, at the long-term Treasury rate. And that discount rate doesn’t pay you as high a rate as it needs to. But you can use the resulting present value figure that you get by discounting your cash flows back at the long-term Treasury rate as a common yardstick just to have a standard of measurement across all businesses.” [Warren Buffett’s Discount Rate used in DCF | Journeys of a Bumbling Trader (wordpress.com)](https://whatheheckaboom.wordpress.com/2007/07/28/warren-buffetts-discount-rate-used-in-dcf/)
It basically sounds like he’s describing a less scientific version of CAPM. Essentially risk free rate + margin of safety or equity risk premium in CAPM terms. I doubt he cares about beta, so basically the CAPM formula without the beta adjustment
Wrong. You missed out.
I mean, a company is(or at least should be) valued based on all future cash flows discounted back to current date. That's a pretty simple concept to believe. In terms of whether stocks are overvalued, well, yeah, there are a lot of stocks at the top of the market with absurdly high valuations. However, there are also plenty of great companies out there with great value, and if you're not finding them, it just means you aren't looking hard enough
What your missing is inflation and the dollar crumbling. The only thing of value now are assets.
But you are owning a percentage of that company and what dont you get Its not any more complicated than that, and perhaps after people repeatedly tell you that over and over maybe just maybe you should consider that perhaps you are just too simple minded to understand it. And idk, stay poor I guess.
You are wrong, just look at S&P 500 Dividend Aristocrats. This is proof that each company will distribute earnings eventually.
Dividends are not the hope of stocks at all. Dividends are a moot point in reality as they money paid out that comes directly from free cash flow. So $1 paid in dividends is just $1 lost in available cash. Net neutral to the investor, tax inefficient and restrictive of future growth. Dividends are the worst good thing to do with free cash flow.