Fair Value of Shares : VALUE BUY

Normally when we buy a product - say a cell phone - we know its fair price. For instance if a cell phone costs Rs.5000, but a showroom has put a selling price for Rs.8000, we know it is expensive. Similarly, if the price tag is put as Rs.3000, we know it is cheaper. In other words, Rs.5000 is its fair value. With this bench market we are able to easily determine if the market price is expensive or cheaper. This concept is very well known and practised right from vegetable market to buying an air conditioner to buying an airlines ticket.

But when it comes to stock market, there is no indication of its fair value. Though parameters like Book value are often used as a reference point, many investors imagine that a price like Rs.20 is cheaper and Rs.1000 is expensive for a share. On the contrary, we should have calculated the intrensic value of the share, which is its Fair Value. Once we know this reference point, it would be easier to make investment decisions.

One way of arriving at the fair value would be the product of Industry PE and the Stock EPS. We computed the Fair value for Top 100 shares listed on the exchange. And the outcome is clear : Some of the stocks which we imagined to be cheap were actually expensive at current market price. And there we few other stocks which are well below its fair value.

For instance, we computed L&T's fair value to be Rs.977, where as its current market price is 1300+. Actually L&T dipped to 980 levels and stayed there for a weeks time. Though the stock was trading at its fair value, there was a general fear that it may fall further. That is a typical scene of PANIC. When we buy stocks at its fair value, there is a margin of safety. And it is even better to buy stocks which are quoting below its fair value.

Not to bother, atleast in future investors can use this bench market Fair Value table and make use of such Panic situations and "BUY When Everyone Sells".

(Click table below to enlarge)