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Cake day: October 9th, 2023

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  • If you’re a value investor then you believe that the actual value of a company depends on its current and future earnings and the market price will tend towards the actual value in the long run.

    But naturally there are other factors that also influence the market price. In fact, the whole point of value investing is to find stocks that are “underpriced”. For various reasons, they are currently priced at a discount to their actual value. Those are the stocks you should buy, and you should expect their price to increase.

    Conversely, for various reasons some stocks are “overpriced”, like Tesla. You should not buy those, because you expect their price to decrease in the long run.

    A corollary is that value investors expect seemingly irrational price movements like we see with Tesla. If share prices perfectly reflected fundamentals, then it would be impossible to find a “good deal”.