If there's a foolproof way to value a stock, I haven't found it. For the rest of us, there's a helpful new book that promises to teach the valuation method used by much of professional Wall Street. To learn more, I reached one of the authors, Pennsylvania State University Visiting Professor of Finance Gary Gray, by phone this week. The focus is to explain how anyone of average intelligence can value a stock.
Most people have no idea really how to do that.
It's an approach that's been pretty well generally accepted by the marketplace, where the value of a stock is the expected value of its future cash flows. Long-run, I think it does. In the short run, maybe not, if there's a lot of momentum investing, a lot of day-trading, a lot of things happening with stock prices that have nothing to do whatsoever with the operations of the company. There's been a lot of talk with the Internet sector being so hot that old and classical methods of deriving the intrinsic value of a stock no longer hold. But if, long-run, the cash flows associated with that stock just don't justify the price, the price will come down.