In a previous post I confessed I struggled with the idea of valuation. Particularly, I struggle with understanding how the price of a stock is tied to the value of the company. I got some great feedback.
I've been told that when I buy a stock, I buy a percentage of the company, including its debts and revenues. But more than that, I buy a share of its expected earnings. Moreover, I was reminded that Graham famously wrote that in the short term the market acts like a voting machine, while in the long term it acts like a weight machine. Basically, that while a stock like Tesla may be overpriced in the short term, the stock price will eventually meet with the company's true valuation in the long term. So I set out to test that theory.
I backtested the stock for Ford Motor Company. Using this site: https://www.portfoliovisualizer.com/backtest-portfolio . If I invested $10,000 in Ford Motor Company in January of 1986, I would have $99,137 by March 31, 2018. Adjusted for inflation, it'd be more like $43,518.
This suggests that Ford Motor Company is worth over 4X what it was worth back in 1986. However, as I understand it, the American auto industry has been in decline and is a shell of the monolith it used to be. I can't understand how a company that is weaker today than in 1986 is valued at 4X what it was back in its hey day. Hey day might be a bit of a stretch, but I think it's safe to say that the American Auto industry was doing much better in the 80s than today.
Can someone please help me understand?
Submitted April 06, 2018 at 07:45AM by HoyaSaxons https://ift.tt/2GF0Noo
