Fair Value Stocks
The 6 Keys to Building a Winning Portfolio of Stocks – Part 2 of 6
By Dr. Thomas K Carr
The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”
In my previous article in this series that can be read HERE, we looked at how “organic growth” that can be sustained over time is essential to finding great long-term investments in the stock market. In this article we are moving on to key number two.
The second key to finding the best stocks for investment is to make sure that the stocks that show sustainable organic growth are also fair value; i.e., stocks that are trading at a fair price. When you buy a stock, what you are buying is the right to share financially in the company’s current generation of net income (if the company pays a dividend) and in the company’s future growth prospects as appreciated by the market through rising share prices. Since that right can be extremely valuable, you will always be paying a premium for it. This is to say that, in most cases you are going to be paying more money per share than the company is actually worth now. This premium is, in effect, your deposit on the right to participate in the future growth of the company the value of which, if you implemented the first key (“organic growth”) correctly, should be much greater than the premium paid. Here in implementing the second key, what you want to avoid is paying a premium that overvalues that future growth and pay a fair value.
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