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The Alchemist (12/09/2007)
By Al Thomas
WHAT IS VALUATION?

Since August we have had a roller coaster market that has caused many to lose their cookies during the precipitous down slides yet"".the "experts" come on CNBC-TV and are telling non-experts what to buy. They claim to be buying. It makes anyone wonder what they are using for brains.

Each one of these mavens seems to have some proprietary formula to understand that a particular stock is "undervalued" and should be bought now "for the long haul". That's the long haul to the poorhouse. We don't have poorhouses any more, but the government expects the broke investor to live on Social Security.

In case you don't know it our Congressmen and Senators do not get the same Social Security we do. They voted themselves a special program to allow retirement on full salary with full medical benefits. Don't squawk. You voted them in.

Today we have a special class of citizen that is a professional politician. Many have never had a job and have been feeding at the public trough all their lives.

Let's get back to valuation.

In a bull market it doesn't make any difference what those secret

formulas are because the stock would have gone up anyway. Again those great formulas will not save the best "undervalued" stock when the bear chews on equities. When the tide goes out all the boats go down.

There are books written with hundreds of pages explaining many methods such as: Constant Growth Formula, Cash Flow, Income Valuation, Discounted Cash Flow, etc, etc. Almost all are based on fundamentals from the corporate balance sheets. They all work - SOME of the time.

What brokers do not seem to understand is that no matter how

"good" a valuation is by any method chosen the stock will go down when a bear market is occurring. Brokers call their clients to say what a good buy XYZ is and then watch it lose money month after month. Here is a basic truth - there is no "good value" during a bear market. The smart investor will not buy until the bear has run its course.

The best value during a bear market is a money market account.

The account won't make much money, but it won't lose 20, 30, 40% or more. Cash is the best value.

Investors are told they must be invested at all times. This not true.

There are times when no stock position will make more money than holding cash. Few brokers know or understand this concept and their company does not want clients in money market accounts as they don't make any money on them. Truly a brokerage company is not there to help you make money. They are there to make money off you.

The first rule of valuation is not to lose money so smart investors should not be mesmerized by mysterious valuation formulas. Cash is king during a bear market.

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know.

Copyright 2007 All rights reserved. 

 

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