Be Rational and Disciplined to Our Investment Philosophy
On investing at Stocks, we must know and differenciate between price and value. Price is what we pay on our investment, while value is what we get. All rational people always want to buy valueable thing at a low price. This is the phylosophy of value investing.
Profit is positive difference between (average) selling price and (average) buying price times the Quantity. Or mathematically can be formulated here:
Profit = Quantity *( average selling price-average buying price), which Average Selling Price > Average Buying Price.
Based on the formula, to maximize profit, we must sell the stock at the highest level, and buy it at the lowest level. Unfortunately, we don’t know the highest level and the lowest level of the stock price.
As we don’t know the lowest level of the stock price, we are still be a rational investor if we buy the stock below its value (price < value, undervalued) which is called value investing. Unfortunately, no one know exactly the value of stock.
Value of a stock is a function of present value as reflected on balance sheet and future value which is reflected on income statement. Then, so many approaches used to valuing stocks.
Because of difference of the methodology and assumptions, the value calculated by one investor (analyst) can be vary with what is calculated by other investor (analyst).
But, one thing that we should hold, we must calculate or predict what is the value of the stock, and just only buy if we think that the price offered is a fair price compared to its value.
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Mamat Rohimat