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True value (01/25/2006)
By Al Thomas

When buying a stock, mutual fund or Exchange Traded Fund (ETF) investors want to know they are

receiving a good value for the money. It seems there are many methods of judging value. Most of them are complicated and many are subjective to the writer's opinion. What is the true value now?

We all remember that as the market fell from its dizzying heights in 2000 that so-called analysts

told the investment public not to worry as the correction only made the stocks more valuable. Yeah, and pigs can fly.

Any investor who has been through a market "correction" (some of which drop 25% to as much as 60% or more) will tell that it is at the top that everything could not be better. Consumer confidence is high. Unemployment is low. Companies are making money. Mergers are going gangbusters. All the talking heads on the radio and TV are cheerleaders for buying just about any stock certificate ever printed. Put you hand in your pocket and hold tightly to your wallet.

The story remains bullish as the market tumbles. The values are wonderful according to Wall Street. If the values are so great then who is selling?

Why does anyone want to know if a stock or fund is a "good" value? The only reason is to find out if the equity will appreciate in price. The bottom line is will the investor make money if that issue is bought?

There are literally hundreds of methods and formulas to give that answer. Each uses the same statistics and each will come up with a different answer. Some methods will work well for a while and then fail miserably. Mr. Investor won't know the means test is not working until money has been lost. A search in Wikipedia, the free Internet encyclopedia, will reveal scores of valuation formulas.

Suppose an investor had bought PMC Sierra (symbol PMCS) after valuation analysis at $14 per

share. It soared to $254, dropped to $110, then back up to $245 and did a Niagara to $2.50. It

now trades below $10.00. There is no valuation method that could have kept an investor on the right side of this stock. The Buy N Holder would be lucky to be even. Let's not forget all those sleepless nights as the stock rampaged lower every day.

Understand what valuation is. It is like beauty. It is in the mind of the beholder. There is no single valuation method that is accepted by the investment community. The investor needs to know one thing and one thing only. If I buy it will it go up? If it does then the valuation at that time was "good". Valuations change and when they change for a particular equity and that equity loses price it is time to say goodbye. Sell.

True value for a stock, fund, bond, house, collectible, anything is the price someone will pay for it at that moment. That is true valuation. All else is speculation.

Read the first chapter of Al Thomas' best selling book, "IF IT DOESN'T GO UP, DON'T BUY IT!"

on the web site www.mutualfundmagic.com. 


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