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What Hedge Funds Really Do by Tucker Balch, Philip J. Romero

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CHAPTER 5

Introduction to Company Valuation

A successful investment indicates that the buyer had a more accurate view of the asset’s true value than the seller had (otherwise, the seller would have demanded a higher price). The reverse is true for failed investments. This implies that different market participants have different views of the value of an asset, like a company’s stock. (Remember that a share of company stock is simply partial ownership of the entire company.) In fact, it is this mixture of views that enables a market to work.

This suggests that investing opportunities appear when an investor spots an asset whose current price diverges from what he believes is its true value. Financial markets may be quite efficient—that is, they ...

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