Many advanced long term Investors/traders talk about probabilities in the market. But I am yet to see someone associate probability with the value of a share.
Usually, we see a fixed value is assigned to a share as the 'valuation'. Different methods may give different values but ultimately, everything boils down to a statement like 'the value of share-X is Rs Y/-'.
So we expect, if the market price of share-X is below Y, and if we buy, the share price will go up and give us profit. BUT most of the time it happens the other way around. Why?
And again, if Y was below the market price which indicate a future price drop, yet the price may go up and up. Why?
So what is wrong (with valuation)?
Is there any better valuation tool to address these?
Above questions haunted me for some time. But no more.
Because, by quite accidentally, I came across a tool which helped to change my perspective about the 'value of a share'.
Before me introducing the tool, think about the following scenario.
Suppose there is a share, fairly valued (not under or over); market price is Rs 20/-. It's a very steady priced share; will never ever come below Rs 20/- (say someone is buying any quantity at 20/- or something like that). Would you buy that share? Probably yes.
Well, here is the other part of the story. The share price is so stable that it will never ever go above 20/- either, and there will not be any dividend payouts either. Do you think this is a good investment?
On the other hand, suppose there's another share; market price is 20/-. But the price will heavily fluctuate between Rs10 and Rs 40/- but never beyond those limits. Do you think you can make some profits out of this share?
A traditional valuation method may value both above shares equally. But the 'share characteristics' are at two extreme ends.
Can we come up with some technique to see the difference in those two shares?
Well, I think I have an answer.
I would call it a tool to find 'share characteristic valuation'
Would you be interested to know more about it?
Pls let me know.