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Why is fair value under GR4 between -5% and +15%?

The concept of what determines fair value can often be confusing for many investors. Many are left aggrieved at how some stocks trade well above their valuation for lengthy periods of time and stocks that are seemingly cheap just keep on getting cheaper as prices decline.

At Stock Doctor our research and high conviction stock picking process places no emphasis on valuations. In fact, though it may be Golden Rule 4 it plays no role in identifying whether a company becomes a Star Stock or not.

Valuation is important for value investors who shy away from companies trading at a premium to their current valuation. Growth investors on the other hand pay little to no emphasis on valuation as they are happy paying a little over the odds to be invested in a fundamentally superior business.

Herein lies the issue of traditional methods of determining fair value. 

A symmetrical 5% either side of the valuation is inadequate for an investment thesis that looks to identify great businesses as a priority in which to invest in. The fact that Star Stocks are amongst the best companies on the stock exchange means it is unlikely that 'dirt cheap bargains' will ever appear as the company's quality will eventually be rewarded by the market.

When a Lincoln valuations are provided on stocks we like (fundamentally superior businesses) we acknowledge that some leeway must be provided to the upside as quality should be rewarded and some premium is justified. However as to whether this suits you will depend on your person investment style and your objectives.   

Growth investors in particular may be comfortable paying higher than the current valuation in order to participate in the company's expected strong future performance.  

There will be times where the market does not recognise for whatever reason the fundamental quality of a company and therefore may indeed represent an opportunity for value investors. However this will not often be the case with great businesses. As the old saying goes, "it is hard to find a stock trading at an 80% discount after its share price has gone up 100%" Such scenarios are when the value investor comes into their element.

To learn more about Lincoln Valuations click here

To learn more about different types of investors and styles click here

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