Essays of warren buffet (before Common stock)
LOS 46.a: Evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market. Recall from the reading on Market Efficiency that intrinsic value or fundamental value is defined as the rational value investors would place on the asset if they had full knowledge of the asset’s characteristics. Analysts use valuation models to estimate the intrinsic values of stocks and compare them to the stocks’ market prices to determine whether individual stocks are overvalued, undervalued, or fairly valued. In doing valuation analysis for stocks, analysts are assuming that some stocks’ prices deviate significantly from their intrinsic values. To the extent that market prices deviate from intrinsic values, analysts who can estimate a stock’s intrinsic value better than the market can earn abnormal profits if the stock’s market price moves toward its intrinsic value over time. There are several things to consider, however, in deci...
