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 writers 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 wont 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. Lets 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.

Al Thomas

Albert W. Thomas has spent most of his life in the field of finance. In 1965 he founded an insurance holding company, Security Dynamics Investment Corporation, after having been an agent and General Agent for several life insurance companies. In 1970 he became cofounder and president of Real Life Estate, Inc., that marketed a unique real estate and life insurance package.

After he became interested in commodities he bought a seat for his personal trading on the Chicago Open Board of Trade, which is now known as the MidAmerica Commodity Exchange. Later he became a full time trader and also acted as a commodity broker for a few select clients. By fellow floor traders Al is considered to be an excellent technical analyst much of which is outlined in his book IF IT DOESN'T GO UP, DON'T BUY IT! It became a best seller on Amazon.

In 1981 he sold his membership on the Exchange and with his wife, Carolyn, lived full time aboard their 41' ketch, the Aumakua (which means guardian angel in Hawaiian). They sailed in Florida and the Bahamas for two years.

He founded World Trading Group in 1984 that grew to the seventh largest introducing commodity brokerage firm in the U.S. with 35 offices from coast to coast, Alaska and Canada. It was sold in 1992.

Al is a graduate of Northwestern University with a B.S. degree in Commerce and is a member of MENSA. He is now president of Williamsburg Investment Company that syndicates his weekly financial column since 1999 to more than 300 newspapers and writes a financial market letter called Over My Shoulder that is quoted in Barron’s and many other publications. A 3-month trial subscription is available on his web site. He is a regular guest on several financial radio talk shows.

His favorite pastime is fishing.

Mr. Thomas is available for speaking engagements. Please call 321-453-5300 for more information.