How to Value a Stock: 2Q2025 Investing Briefing
This isn’t advice on how to invest your money or someone else’s money. I’m sharing my experience so that it serves as an example to develop your own framework.
How do I know whether a stock is underpriced or overpriced?
July 14th 2025
I've spent considerable time overanalysing this question. Here's what I wrote in part of my last quarterly update for paid subscribers:
It’s hard to know what fair prices are for these stocks, but here are two factors I think about:
What’s the PE ratio of 30 year US bonds? Currently the rate is 4.877%, so that means 30 year bonds are priced at a ~20x multiple. And, bonds don’t grow. If a good stock (founder-run and profitable) is available at close to 20x, maybe that’s a good sign. Something I find disciplining is to set stock alerts for those I’m interested in when they cross a threshold price - this stops me from buying them on a more ad hoc basis.
My weighting of stocks versus other assets. If my weighting of stocks has recently increased - due to market movements in prices - maybe that’s a bad time to buy more stocks. Conversely, if my weighting of stocks has gone down because the stock market is down, maybe it’s a good time to buy stock in companies I consider solid.
The problem is - no matter what formula I come up with - there will always be examples where my formula is wrong:
Maybe a stock is trading above 40 times earnings, but the business is seeing phenomenal growth - like Nvidia did over the past years. So, it's still good value?
Perhaps a stock trades at a low multiple of earnings, but there isn't much growth, so maybe it's not all that cheap.
There are formulas designed to balance profitability and growth, or, you can overanalyse it yourself. However, over the last quarter, I've decided there is a better question to ask than "What is this stock worth?"
Who knows better than me what this stock is worth?
Somebody that might know better than me is the company's management. They might telegraph their opinion through certain actions, namely:
The company buying back its own stock
The CEO buying or selling their company's stock
The smell might be as follows:
If a company or the CEO is buying back its stock at $100 per share, management may see the company as significantly undervalued (relative to other options for spending their cash, say on internal company investments).
If a CEO is selling a lot of their stock at $100 per share, that may indicate the stock is overvalued.
Now, there are edge cases - and I won't list them all:
It may be favourable for management to buy back stock to increase earnings per share in a way that triggers bonuses for them. One form of protection against this is to focus on companies where the CEO owns a lot of the company's shares (not just options) and has incentives aligned on the upside and the downside.
CEOs sometime sell their stock to invest in other projects (e.g. Jeff Bezos selling Amazon stock to invest in Blue Origin). This mitigates the signal a bit, but not entirely. It can indicate some diffusion of focus.
Some concrete recent examples of signals from buyback behaviour are:
Berkshire Hathaway has historically bought back a lot of its own stock, but not so much in the last year. This suggests that - at recent prices - Buffett feels Berkshire is not highly undervalued. (That's not to say it's overvalued! Although it could be?).
AirBnB is currently buying back it's own stock. The founder is the CEO and owns a lot of stock. Perhaps that is an indication the stock is somewhat undervalued (or perhaps they don't know what else to do with the cash! Although, if one's stock is overvalued and one wishes to distribute cash, it can be better to issue dividends. Somewhat mitigating this is that dividends cause a taxable event for shareholders.).
By monitoring stock purchases and sales - and perhaps combining it with some rules of thumb, maybe around debt and being cash flow positive - I somewhat manage risk and make use of rough signals on valuation. If I am investing for the long run, maybe this is good enough to know when to enter and when to exit, rather than trying to calculate a fair value for the stock based on price to earning multiples.
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As usual, for paid subscribers, I'll now go through:
Updates on my “personal/conservative” funds. In brief, I'm starting to think about my Berkshire Hathaway position and how to manage that over the longer term. I also make some notes around real estate and duration.
Updates on my “growth / ambitious” funds. Last quarter I made some investments in private businesses through a new syndicate. I'm also refining my shortlist of public companies.
As a bonus, I'll cover how I’m using AI to help run due diligence on private and public companies, including the long prompt/template I have developed for each.