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Paradox of valuation (of stocks)

Short questions to ask yourself before buying a stock

Alex Chua

Alex Chua

01 Dec 2020

Level 9ยทSeedly student Ambassador 2020/21 at Seedly

Person A: Hey! Do you think I should buy stock XXX or stock YYY?

Person B: Why do you think stock XXX is so good?

Person A: Because Ben says so

Person B: Then Why do you believe Ben is correct?

I believe most of you have gone through this process, either as person A or person B when you are investing. Maybe as a second opinion. However, often times, you are unsatisfied with the answer.

Let me give u a scenario (you can watch paradox of value on this link). In a game show, there are 2 rewards: a diamond and water. Without a doubt, you will want a diamond. What about when you are dehydrated in a desert? In this scenario, water is what you want.

To learn more, look at the short clip by TED-ed provided

From these 2 examples, I can conclude that value is different according to scenario, and person. How then do you value a stock? Why do you want to buy a stock? Why do you buy iPhone? Why not Xiaomi or Huawei or Samsung....

iPhone is useful, trendy. I like the user experience, the camera....

Why do you buy Tesla, DBS, Capitaland? Asking yourself this question is important because this question will lead you to why do you sell Tesla/DBS/Capitaland. Else, you will make an irrational decision or dumbfounded.

Let me give you a more detailed analysis/ opinion on Tesla to refer:

Electric Vehicle will be an unstoppable force as people are moving towards cleaner energy. What are the challenges or the main bulk of the cost of EV? Battery. How many automobiles are there? they will have to fight for these very resources. Behind Tesla electric vehicle, Elon Musk is innovating on battery efficiency and recycling to ensure cost is driven down.

Note that automobile industries are very concentrated, how do the companies capture customer and ensure profitability?

In conclusion, different people value things differently. If, for example, they value a stock highly, they are willing to pay more to own these shares.

Define your own valuation behind the stock. Give a reason. Give a benchmark. Then follow through as plan. There is one thing that will always affect your decision. NOISE. Learn to filter and find what's valuable

If you cannot bear the risk of choosing your own stock, then go for capital preservation. I would recommend Robo-advisory or REITs ETF


What are your thoughts?



Alex Chua

Alex Chua

01 Dec 2020

Level 9ยทSeedly student Ambassador 2020/21 at Seedly

A sustainable analyst and an undergraduate pursuing Engineering System Design in SUTD. Be the master of $ and be slaved by $