After using most of the standard valuation techniques and back testing them on stocks, I realized that none of them work the way we expect. The predictions are always wrong and the response from the stock market is well, always contrary to what we expect.
So I reversed the thought process and started trying to understand, why does stock market reward certain stocks in certain years and not do so for others which seemingly have same performance. I eventually converted this thought process in my own valuation model, “Expectations Value”.
Market in its collective wisdom values a company on the expectations of its earnings growth for the current year. Meeting or exceeding these expectations result in the markets rewarding these securities. This is similar to employee appraisal process.
I have extensively back tested this model and the results are also available on my blog. Inviting comments from this esteemed group. Thank you.