MONEYSENSE 04.22

Valuations & Volatility

By Ray DiBartolomeo

In 2022, the financial world is far more complex. Valuations & Volatility are the leading indicators of this new playground and here’s how to work within their parameters to maximize your success in the market.

Valuation

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. Valuation is utilized for many reasons including tax assessment, wills and estates, divorce settlements and business analysis.[1]There are many techniques used: An analyst placing a value on a company looks at the business’s management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.[2]

6 Ways Valuation Affects Markets

1. Valuation of a suffering company

When valuing “distressed securities”, various adjustments are made to the valuation result taking into consideration excess or restricted cash, other non-operating assets and liabilities, and excess salaries in the case of private companies. The financial statements are also a factor.[3]

2. Valuation of a startup company

Startup companies such as Uber, which was valued at $50 billion in early 2015, are assigned post-money valuations based on the price at which their most recent investor put money into the company. The price reflects what investors are willing to pay for a share of the firm.[4] [5]

3. Valuation of intangible assets

Valuation models can be used to value intangible assets such as for patent valuation, but also in copyrights, software, trade secrets, and customer relationships.[6] As economies are becoming increasingly informational, it is recognized that there is a need for new methods to value data, another intangible asset.

4. Valuation of mining projects

In mining, valuation is the process of determining the value/worth of a mining property – i.e. as distinct from a listed mining corporate. Mining valuations are sometimes required for IPOs, fairness opinions, litigation, mergers and acquisitions, and shareholder-related matters.[7]

5. Valuation of financial services

There are two main difficulties with valuing financial services firms.[8] [9] The first is that the cash flows to a financial service firm cannot be easily estimated, since capital expenditures, working capital and debt are not clearly defined.

6. Valuation of mismarking

Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing.[11] Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities’ net asset value, or NAV), and thus misrepresents performance.[12] [13]

Volatility

Volatility is the degree of variation of a trading price series over time. In the securities markets, volatility is often associated with big swings in either direction. The Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility. Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions. [14]

A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically and tends to be steadier.[15][16]

6 Ways Volatility Affects Markets [17] [18] [19] [20]

1. The wider the swings in an investment’s price, the harder emotionally it is to not worry.
2. Higher volatility of returns while saving for retirement results in a wider distribution of possible final portfolio values.
3. Higher volatility of return when retired gives withdrawals a larger permanent impact on the portfolio’s value.
4. Price volatility presents opportunities to buy assets cheaply and sell when overpriced.
5. Portfolio volatility has a negative impact on the compound annual growth rate (CAGR) of that portfolio.
6. Volatility affects pricing of options.

Valuations & Volatility are important. At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.