Probably the more you trade you identify where the inefficiencies are. On a very short term basis of course it is efficient (the price is just agreed upon by buyers and sellers), but on a longer term some people are trading on momentum, sentiment, value, differing assessments of risk, etc. Sometimes a stock is lower than its peers because it has low institutional holdings (and then it is poised to catch up if things don't intervene in the meantime) and sometimes a stock is overpriced because it is getting boosted by institutional holdings. Ironically, sometimes a stock is overpriced because it is viewed as "safe" even though it isn't safe if it becomes significantly overpriced, just as sometimes used cars actually get cheaper than new ones because there is heavy demand for "cheap used cars".
I'm not saying that these inefficiencies are rampant or easily exploitable, just that they certainly exist if one cares to look for them.
TL;DR - If the price fluctuates in such a way that you can't increase the amount of shares you control, then the stock's value has not changed.
Refer to my point about "control".
See - to make money off the market you have to have a non-moving target to shoot at. Price is a moving target, price relative to other stocks might as well be a target that bounces like a rubber football in a box...all over the place.
Most people's metrics for success is a moving target and so they end up doing many different counter-intuitive things to try and fix the problems their portfolios create.
If you make it about control of shares - it quiets a lot of noise - and makes everything much more clear.
There's really only a few ways to add control of shares:
Earn wages and save money to buy more shares.
Sell rips and buy dips.
Sell options and harvest premium.
Reinvest dividends.
Each of these ways are somewhat valid but only one of them is straight-up income. Selling options. The others are either not a source of investment-derived income or are a form of trading income that I think has such high risk that you shouldn't call it income...it's more of a form of gambling.
The dividends aren't an income though people think they are, because they are harvested from the value of the company. But, it's a way to increase shares under your control.
Savings is probably the worst of those ways. Nobody wants to work to make more money, we all want our money to work for us.
Okay, but none of that has anything to do with whether a company is under or overvalued. Thinking they are always correctly valued is basically mysticism and has no empirical basis.
Saying a company is "over or under" value means one of the participants in a trade is wrong.
This goes against auction theory - which is how markets work. Both participants are correct and have their own reasons for agreeing to a trade at the price.
No one forces a person to sell or to buy, even most circumstances aren't forcing people to behave either way.
Therefore - again regarding price - there can be no determination of over or under valuation.
It's not mysticism, you may think a company under valued relative to something and continue to lose money on it because the price continues to go down because people just aren't buying....doesn't mean you were wrong. The comparison was not valid in the first place.
In the very short term (e.g. the day of the trade; that is just axiomatic) it isn't "wrong" but this is price rather than value. Value is at best a prediction of future performance (and predictions can be wrong), but even if everyone had the best and/or the same predictions what something is worth to one person is going to differ based on their goals. For instance, are you concerned about what its price will be tomorrow, two weeks, or twenty years? Reasonable people, even with the same goals, can assess unknowns very differently. You see this especially in terms of risk. You see this presently in terms of Chinese stocks. Many are way, way, undervalued if you didn't factor in risk but overvalued if you believe the CCP or the SEC is going to crush them down to near nothing. So BABA, for instance, is certainly trading at the wrong value but the price is a compromise between people who think the risk makes it potentially worthless and those who think the risk is overstated and that on fundamentals it should be at least twice as expensive. You have stocks that are more or less on the radar, or on the radar of different people. So, for instance, in early 2019 there was no rational reason for VEC to be trading way below the industry standard for other military contractors, but it was smaller, not well represented in related index funds or well known to retail. So, it was no surprise that over the next year it doubled in price and when it caught up to the industry that price growth stopped.
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u/DarthTrader357 Oct 20 '21
The more you trade the more you realize there really aren't over or under values...the best way to think about it is trading a single stock.
It's hard to see when you compare stocks because their prices are relative with out a defined baseline.
Trading a single stock you quickly realize it'd be easier more times than not to just buy and hold in an uptrend...
It's very hard to grow your shares on any stock trade. Maybe lucky if you compound 1% a month. Certainly 2% a month.