I know each one of us knows that we have to invest in quality stocks but do we know what cheap means in those stock prices? Actually, the best way to know whether the current price is less than its intrinsic value that means what is the worth of that stock is. The problem is what we have understood in Investing is that we should always buy quality stocks, which is correct. But again quality stocks do not mean that it is a great investment at the price it is in.
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The price we pay for the stocks should depend on what value we are getting. If the stock's price is too high then we might not get the value we are paying for that stock. So that means not all quality stocks, when it is down are cheap. Say for example if you have paid more money for a stock than it's actual value then it might take years for the profit to generate or you might end up in loss too.
According to Warren Buffet:
Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
When we are investing in stocks, we should always look for high-quality stocks at an attractive price to buy and continue our investment. There are a lot of ways to find out what is the intrinsic value of the stock, for example:
Asset Based Valuation - Check how many assets the company have against the liability.
PE Based Valuation - Check what is the P/E Ration the company stock is trading. For example, if the P/E ratio is 5 that means people are willing to pay $5 for a $1 profit. Similarly, a P/E ratio of 200 means that people are willing to pay $200 for a $1 profit. So in both scenarios, the first stock looks attractive and cheap.
And then there are other methods too, but for us, these two methods are more than enough to find out of the quality stock is available for cheap or not.
So what we have to see is to check if the stock is trading for cheap or not, not because it is down 5%.
