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birb_cromble  4d ago (text post)   830 thread views

Weekly Finance Thread (without clever alliteration)

A weekly thread to discuss financial matters - from personal all the way up to global.

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One rule of thumb I've seen is 10x revenue. It seems to work fairly well in the general case.

What does "work well" mean, though. What's supposed to happen when you get the price right, vs. when you get it wrong?

I'll try to describe it in a way that's probably not 100% accurate, but simple enough to explain briefly. When you buy a share in a company, you do so because you believe that it will provide value back to you over time. Most commonly, this is done as either a dividend (traditionally) or as a share buyback (more common these days).

When you make that purchase, you have to decide how much you believe you'll get back, and how quickly you'll believe it'll happen. Deciding that can involve a lot of different factors. One easy one is to look at their revenue. A company that's earning ten billion dollars a year is more likely to pay back your investment quickly then a company earning a buck fifty a year.

Share price reflects that belief of ROI. Higher prices represent a confidence that the company will have a better payoff, and company valuation is usually a function of share price.

I'd rather never receive any dividends from any stock I buy. P/E is not a great metric btw. You don't get the best winning stocks by insisting they have a low P/E at the time of your purchase.

Though, yes, SPCX is valued absurdly highly, by themselves, and seek to enrich their private investors and Musk through frothy retail buyers.

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