Hey,
I want to share with you a nice algo,
It's not mathematical, and it won't be true in all companies,
But it's a nice tool for pricing,
Are you familiar with someone telling you about a stock that has a very high potential but is trading cheap, and he is sure that he has found the find of his life,
But anyway, everywhere you look left and right you will see companies that have high potential and are trading cheaply,
All dream shares are traded cheaply in relation to their potential,
OK, so here I want to explain the rationale, and give a tool to explain the pricing of the market,
When we come to analyze a dream share, we need to examine three things,
1- What is the potential?
2- What is the chance of success?
3- If it succeeds, how long will it take,
For pricing, you need to calculate like this:
(This is the algo, it's not accurate, it's just to clarify the idea)
The potential, minus the chance, minus the time.
The chance is priced in half. If, for example, the company has a 30% chance of succeeding, then you need to calculate the potential multiplied by 0.15%. Or if the company has a 90% chance of succeeding then price the potential times 0.45%.
And the time is priced at 50% every 3 years. which means every 3 years of time the value will be reduced by half,
For example:
An oil exploration company that has a license,
the potential (after all costs of course) is 500 million dollars in value, if it succeeds.
The chance of success is 50%.
And the time it will take, if it succeeds, is 6 years.
It should be priced in potential (500 million), minus the chance (half of 50% = 125 million), minus the time (6 years = a quarter of the value = 31 million)
Total: 31 million.
This means that in a healthy way, a company that has a potential of 500 million, will be traded at 31 million.
It's not a market distortion, it's a healthy market.
Such examples can be found in every second dream company.
But what is different about us from the usual healthy pricing?
Here the potential is hundreds of billions,
Chance of success is 95-99%
And the time is very short.
Is the current pricing reasonable?
In my opinion,
the correct pricing for the current stage the company is in is 100 times the current value.
The real value will float,
Until that happens, the company will move forward and increase its real value more and more,
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(20min delay)