Stock Price Is Not Valuation

How I Use Valuation to Make Better Decisions

One of the most common mistakes investors make is confusing stock price with valuation. A stock price tells you what one share is trading at. Valuation tells you what the entire business is worth. These are two very different things.

That’s why valuation analysis sits at the core of my investing process.

There Is No One-Size-Fits-All Valuation Metric

Different businesses need different valuation lenses. Depending on the industry, I use metrics like P/E, P/B, EV/EBITDA, or Market Cap to Sales. Banks and financials often make sense on P/B or ROE-based metrics. Capital-intensive businesses may be better judged on EV/EBITDA. Consumer or platform businesses may justify higher P/E ratios.

The key point: no single ratio works for all stocks.

Valuation Is Always Relative

Once I choose the right valuation metric, I don’t look at it in isolation. I compare it against three things:

  1. Broader market valuation
  2. Industry or peer group valuation
  3. The company’s own historical valuation range

This gives context and helps me judge whether the stock is undervalued, fairly valued, or overvalued.

Example: NSE – Reliance Industries (Illustrative)

Let’s take Reliance Industries as an example to understand this better.

Assume its 5-year median P/E is around 26. Historically, the stock may have traded:

  • Near 24 P/E during pessimistic phases (undervalued zone)
  • Around 28 P/E during euphoric phases (overvalued zone)

If the business fundamentals remain intact and the stock moves closer to the lower end of its historical valuation range, risk reduces and probability improves. That’s where accumulation makes sense. When the stock trades well above its historical comfort zone, future returns compress, and it may be time to reduce or exit.

This is not about predicting tops or bottoms. It’s about playing ranges and probabilities.

Valuation Helps Improve Odds, Not Certainty

The logic is simple. Buy strong businesses when they are undervalued. Sell or reduce when they become overvalued.

Do this consistently, and you’re no longer dependent on luck or market mood. You’re letting probability work in your favour.

And remember—P/E is just one example here. Depending on the business, any relevant valuation parameter can be used, and the same framework applies when comparing industry valuations and broader market valuations as well. What matters is discipline, context, and consistency.

Have a good day,

- AR