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Value Investing in Growth Companies: How To Spot High Growth Businesses and Generate 40% to 400% Investment Returns by Rusmin Ang, Victor Chng

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Chapter 7

Valuation—The Fourth Piece of the Puzzle

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The Valuation of a Stock

The fourth and final piece of the puzzle is valuation—the financial projection. This is the most important piece to access once the other three pieces have been addressed. Here, valuation is what we call the final part of assessment before buying into a stock. Needless to say, every stock has a price tag. So, at what price is a stock considered cheap? This chapter serves to answer this question.

Though we cannot expect to buy a stock at its absolute bottom, for example, in the 2008–09 crash, when the Straits Times Index (STI) was at its lowest, at 1,500 points, and sell it at its peak in 2010, when the STI had recovered to above 3,300 points, we can avoid doing the opposite. Many investors commit the mistake of buying high, when someone they know is supposedly making a killing in the stock market, and selling low, when prices start to dive. Now that you are aware that Mr. Market is subject to mood swings, you need to know how to make full use of its irrationality, in order to purchase stocks at bargain prices and sell when others are ready to pay a premium price. In order to do this, you need to know how to calculate the intrinsic value of the company based on a certain set of assumptions. Valuation can help you achieve this, so that you can buy a growth company when it is trading at a discount from its ...

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