Understanding the intrinsic value of a stock is fundamental to investing. But can we truly pinpoint the fair value of a stock? Let’s delve into the relationship between stock prices and intrinsic value.
The Essence of Stocks and Fair Value
Purpose of Stock Issuance
The original purpose of stock issuance is for companies to easily raise large amounts of capital, and for investors to receive dividends proportional to their invested shares. However, buying stocks at a price below their fair value and selling them after the price has increased is not the essence of stocks. It is merely incidental income generated during the holding process.
Fair Value and Stock Prices
Even when no one cares about the fair value of a company, stock prices are formed, and stock trading proceeds normally. Experts explain that stocks reflect the fair value of a company, but this is merely a guideline for investors to buy and sell stocks. If stock prices truly followed corporate values, they would eventually converge to those values, but in reality, this is not the case.
Supply, Demand, and Stock Prices
The Impact of Supply and Demand
In the case of memory semiconductors, when new products are launched, it is difficult to maintain existing production lines, leading to a faster decrease in supply than demand, causing prices to soar. This shows that supply and demand have a greater impact on prices than the intrinsic value of goods. Even if a new product has better performance than an existing one, it doesn’t mean everyone will use the latest product.
Misconceptions of Value Analysis
Value analysts believe that if a company has high intrinsic value, demand will naturally be created and stock prices will rise, but this is a serious misconception. If demand for new products is not generated, they will be discarded.
Practical Difficulties in Predicting Stock Prices
Incomplete Information
The idea that stock prices find their fair value assumes that all investors have complete information and make rational decisions. However, this is impossible in reality. Not all participants can have complete information, and in some cases, stock prices can be easily manipulated.
Market Price and Intrinsic Value
Benjamin Graham stated that market prices could deviate from intrinsic value due to market fluctuations, but market prices often stay away from intrinsic value for a long time. Although stock prices may converge to an ambiguously calculated ‘fair value,’ the timing and exact price are unpredictable.
Analysts and Fair Value
Limitations of Price Targets
The main factor influencing analysts’ price targets is the current stock price. Without knowing the current stock price, analysts cannot accurately calculate price targets. They do not derive price targets through precise calculations based on financial statements but rather make rough estimates of the stock’s value compared to its current price.
Understanding Through Examples
In early 2009, the price targets for top market cap stocks like Lotte Shopping and Hana Financial Group differed by more than twice. This shows that different analysis methods and evaluation criteria can lead to significant differences in price targets.
Conclusion
Finding the fair value of a stock is like chasing a phantom. Stock prices are determined by various factors, making it difficult to predict solely based on a company’s intrinsic value. Therefore, investors should consider multiple factors, and relying solely on fair value analysis for investment decisions can be risky.