Definitions of terms as used by Investing Perspectives:
Edge is a security’s theoretical value relative to its market price. Edge tells us the percentage profit or loss if we buy a security at the current market price and price subsequently moves to the security’s theoretical value.
Edge is calculated as:
Edge = 100 x (Theoretical Value / Price – 1)
In the case of a share the theoretical value is its intrinsic value, usually calculated using a Discounted Cash Flow formula.
Investment horizon can be interpreted as the number of years it will take for a company’s book value per share to equal its current market price. This is based on the company’s current book value per share and return on equity and assumes all profits are reinvested and compounded.
Investment Horizon (Years) = log(Price/Book Value) / log(1 + Return on Equity)
The formula is derived from the standard compound interest formula:
Future Value = Current Value x (1 + Return)^Years
Which is restated as:
Price = Book Value x (1 + Return on Equity)^Years
It is then rearranged to solve for Years as per the investment horizon formula above.
A projection is taking the trend or trajectory of a data series and projecting it forward to estimate its likely value at a date or time in the future.
1. Projecting the future intrinsic value of a stock.
2. Projecting the price action of a stock during the post ex-dividend trading period based on the average ex-dividend trading price action from previous years.
3. Projecting seasonal performance. The chart below shows the 2, 4, 6, 8, 10, and 12 week performance projections for a stock based on average seasonal performance referenced to a start date of 14th February. The chart shows that for this stock the average 10 week performance is approximately 8.7%.
Share value dynamics is the exploration of how the intrinsic value of a share changes over time. The intrinsic value of a share is not static and evolves dependent upon the changing profitability of the company. It can also change in a step fashion due to corporate actions such as a capital raising or trading ex-distribution.