The Research Of Stock’s Investment Based On Intrinsic Value

With the tremendous success of value investment school in the area of investment, the intrinsic value of the stock has become a hot topic of the investors, so far, the main methods to study the intrinsic value of the stock can be divided into two types:absolute valuation method and relative valuation method. Two typical absolute valuation methods: discounted dividend model and free cash flow model; two typical relative valuation methods:price-earning ratio model and price to book ratio.In this paper, we have analyzed the key factor affecting the intrinsic value of the stock from the classical free cash flow model, that is, the growth of the company. We analyze whether a company has good growth mainly from two aspects, that is, the company’s comprehensive development and the economic benefits created by the company. So, we think that the key factor to obtain long-term investment success is to choose a company of good growth.For the company of good growth, we define the concept of stock’s reasonable valuation with the method of price-earning ratio model, and we use it to reflect the intrinsic value of the stock. When we use the method of price-earning ratio to estimate the stock’s intrinsic valuation, we define the standard of reasonable price-earning ratio mainly from two aspects. One is the overall average level of the industry which the company belongs to, another is the overall average level of the foreign mature stock market. Investors can choose specific standard according to their own risk preference.Since the company’s growth is constantly changing and the standard of reasonable price-earning ratio we have defined is a random variable, the reasonable valuation of the stock’s intrinsic value which we defined is a random variable. While we make the investment strategy based on the idea of intrinsic value, we must track the dynamic changes of the company’s growth of real-time and make use of market volatility. On this basis, we propose a robust profitable strategy of long-term investment:As a reference to the stock’s reasonable valuation, when the stock price is less than the reasonable valuation, we buy shares successively and hold them; when the stock price is higher than the reasonable valuation, we sell stocks successively. In the long-term investment period, making use of the market volatility, using this strategy circularly will help investors avoid market risk, lower investment costs and increase earnings steadily. In addition, if the company’s growth declines, in order to reduce the loss, we should gradually reduce the number of the stocks, even decisively sell out.