Value Trading
Overview
The value approach to trading seeks to
formulate a theoretical value for an asset, that is, a fair price that would paid by a an agent
using
rational decision making.
The models used to determine a theoretical value is dependent on the asset in question. For equities, there is
an abundance of data, most of which comes from the finanical statements of the company. For other
assets, such as crypto currencies, the amount of data from which to draw to determine value is marketably less.
Theoretical Value
The beginnings of most models of value is usually
present value. That is, most instruments
are valuable because they lead to a cash flow or a stream of flows in the future. Some instruments, such as equities and
bonds, have periodic cash flows that are distributed to the holders. (dividends for equities, interest
payments for bonds).
Of course, many of the cash flows are not deterministic. That is, they are not necessarily known in advance
and may be assumed to random to some degree. The present value framework can still be applied, but may
require some sophistication in assigning a discount rate.
Quality and Value
Quality is often used to refer to (mostly) qualitative factors that
should in theory affect the theoretical value of an asset, but either not always considered a value factor, or
is separated out in order to provide a better categorization of factors influencing theoretical value.
Value in Various Asset Classes
