Stock valuation - Volkswagen
The prices dropped because the scandal could mean: This some people estimated that the company could lose money, or have smaller profit. Thus each share was worth less money going forward. The mechanism is that in order to sell their shares the current share owners had to settle for lower prices. (I live in the UK and along with my wife we both drive Volkswagen cars.) A few factors: VW is widely acknowledged as having some of the best diesel car engines.  -Now lot of people are questioning if diesel car will be outlawed. VM management has just said they don’t know what their workers are doing! The USA has made it clear they will create pollution law in a way that benefit their own car makers.   (E.g. they don’t care about CO2.) If not diesel cars, then it needs hybrid or electric cars to get good MPG – VM is not seen as a leader in these. Hybrid cars tend to be gas as diesel engines cost too much. VW is no longer looking like a nice safe investment!   I think VW will recover, but it may get worse for them before it gets better - trying to call the bottom of a stock is high risk. "The primary reason a scandal like this hurts the company is the ""bottom line.""  Any legal action means defense costs.  In this case the potential of massive fines became reality.  And a buyback program.   So, if any publicly traded company stacked up $10B in assets, doused it in diesel and set it on fire, their stock would take a dip too. Billions in revenue directed to the expense side of the ledger instead of the profit side.  That money should have gone to building the company and dividends."
"The property tax valuation and the fair market price are NOT one and the same.  They track each other, correlate to each other, but are almost NEVER the same number. In some parts of the USA, a municipality has to re-assess property tax values every ten years.  In these places, the tax value of a property is on something like a 10-year moving average, NOT on the volatile daily market price. EDIT:  It is easy to fall into the ""trap"" of thinking that property tax valuation is intended to represent fair market value.  It's INTENT is to provide an accurate (or, as accurate as possible) RELATIVE VALUATION of your property compared to the other properties in the municipality. The sum of all the property values is the tax base of the municipality.  When the town budget (which is paid in part via property taxes) is set, the town simply divides the tax base into the budget total to arrive at the ratio of tax-to-collect, to the tax base, also called the ""tax rate per thousand dollars of valuation.""  i.e. if the town tax base is US$10,000,000, and the town budget is US$500,000, then the ratio is 0.05, or $50 per thousand dollars of valuation.  If your property is assessed at US$100,000, then you would pay 100 x $50, or $5000 in property taxes that year. Since this is the goal of the property tax valuation, NOT deciding what your house is worth on the open market, then we are left with the question of ""why use the market value of a house for property assessment?"" and the answer is that of all the various schemes and algorithms you can try, ""fair market value"" is the easiest and most accurate...IF TIME FLUCUTATIONS ARE TAKEN OUT.  For example, if I buy a house in a development for $250,000 today, and next summer the housing market crashes, and you buy the identical house next door to me for $150,000, it does NOT stand to reason that you should pay less taxes than me, because your house is ""worth"" $100,000 less.  In fact, BOTH our houses are worth $100,000 less. What matters most in property tax valuation isn't the actual number, but rather, is YOUR valuation the same as other essentially similar properties in your tax base?  Getting the RELATIVE ratio of value between you and your neighbors correct is the goal of property tax valuation." My reaction to this is that your observation @D.W. is spot on correct: It sounds like long-term market timing: trying to do a better job than   the rest of the market at predicting, based upon a simple formula,   whether the market is over-priced or under-priced. I read the post by the founder of Valuation Informed Indexing, Rob Bennet. Glance at  the comments section. Rob clearly states that he doesn't even use his own strategy, and has not owned, nor traded, any stocks since 1996! As another commenter summarizes it, addressing Rob: This is 2011. You’ve been 100% out of stocks — including indexes —   since 1996? That’s 15 years of taking whatever the bond market, CDs or   TIPS will yield (often and currently less than 2%)... I’m curious how   you defend not following your own program even as you recommend it for   others? Rob basically says that stocks haven't shown the right signals for buying since 1996, so he's stuck with bonds, CD's and fixed-income instead. This is a VERY long-term horizon point of view (a bit of sarcasm edges in from me). Answering your more general question, what do I think of this particular Price/ Earnings based ratio as a way to signal asset allocation change i.e. Valuation Informed Investing? I don't like it much. "It does depend, but in the effort to be efficient we usually just add back Depreciation, Amortization, and Stock Based Comp.  [Although adding back SBC is hotly debated](https://www.wallstreetprep.com/blog/stock-based-compensation-treatment-dcf-almost-always-wrong/), we usually still add it back at my firm.  Keep in mind I'm in M&amp;A, so we don't really concern ourselves with creating the ""purest"" valuation...  * EBIAT * Add Depreciation * Add Amort * Add SBC * Subtract Capex * Add the decrease in NWC * Subtract the increase in NWC * = FCFF" "A share of stock is a share of the underlying business. If one believes the underlying business will grow in value, then one would expect the stock price to increase commensurately. Participants in the stock market, in theory, assign value based on some combination of factors like capital assets, cash on hand, revenue, cash flow, profits, dividends paid, and a bunch of other things, including ""intangibles"" like customer loyalty. A dividend stream may be more important to one investor than another. But, essentially, non-dividend paying companies (and, thus, their shares) are expected by their owners to become more valuable over time, at which point they may be sold for a profit. EDIT TO ADD: Let's take an extremely simple example of company valuation: book value, or the sum of assets (capital, cash, etc) and liabilities (debt, etc). Suppose our company has a book value of $1M today, and has 1 million shares outstanding, and so each share is priced at $1. Now, suppose the company, over the next year, puts another $1M in the bank through its profitable operation. Now, the book value is $2/share. Suppose further that the stock price did not go up, so the market capitalization is still $1M, but the underlying asset is worth $2M. Some extremely rational market participant should then immediately use his $1M to buy up all the shares of the company for $1M and sell the underlying assets for their $2M value, for an instant profit of 100%. But this rarely happens, because the existing shareholders are also rational, can read the balance sheet, and refuse to sell their shares unless they get something a lot closer to $2--likely even more if they expect the company to keep getting bigger. In reality, the valuation of shares is obviously much more complicated, but this is the essence of it. This is how one makes money from growth (as opposed to income) stocks. You are correct that you get no income stream while you hold the asset. But you do get money from selling, eventually." This answer fills in some of the details you are unsure about, since I'm further along than you. I bought the ESPP shares in 2012.  I didn't sell immediately, but in 2015, so I qualify for the long-term capital gains rate. Here's how it was reported: The 15% discount was reported on a W2 as  it was also mentioned twice in the info box (not all of my W2's come with one of these) but also  This showed the sale trade, with my cost basis as the discounted price of $5000. And for interests sake, I also got the following in 2012: WARNING! This means that just going ahead and entering the numbers means you will be taxed twice! once as income and once as capital gains. I only noticed this was happening because I no longer worked for the company, so this W2 only had this one item on it. This is another example of the US tax system baffling me with its blend of obsessive compulsive need for documentation coupled with inexplicably missing information that's critical to sensible accounting. The 1099 documents must (says the IRS since 2015) show the basis value as the award price (your discounted price).   So reading the form 8949: Note: If you checked Box D above but the basis reported to the IRS was   incorrect, enter in column (e) the basis as reported to the IRS, and   enter an adjustment in column (g) to correct the basis. We discover the number is incorrect and must adjust.  The actual value you need to adjust it by may be reported on your 1099, but also may not (I have examples of both). I calculated the required adjustment by looking at the W2, as detailed above. I gleaned this information from the following documents provided by my stock management company (you should the tax resources section of your provider): You are omitting how the company made 120 million in the previous year and may be facing a shrinking market and thus have poor future prospects. If the company is shrinking, what will the shares be worth down the road. Remember companies like AOL or Blackberry? There was a time they had big profits before things changed which is the part you aren't considering here. If the company has lost something big on its earnings, e.g. the oil wells it owned have run out of reserves or the patents on its key drugs have expired, then there could be the perception that the company won't be able to compete in the future to continue to deliver earnings. Some companies may well end up going broke as one could look at GM for a company that used to be one of the largest car companies in the world and yet it ended up going broke. You are right: if the combined value of all outstanding GOOG shares was $495B, and the combined value of all GOOGL shares was $495B, then yes, Alphabet would have a market cap of at least $990B (where I say at least only because I myself don't know that there aren't other issues that should be in the count as well). The respective values of the total outstanding GOOG and GOOGL shares are significantly less than that at present though. Using numbers I just grabbed for those tickers from Google Finance (of course), they currently stand thus: Your analysis is correct.  The income statement from Google states that LinkedIn made $3.4 million in 2010 - the same number you backed into by using the P/E ratio.  As you point out, the company seems overvalued compared to other mature companies.  There are companies, however, that posts losses and still trade on exchanges for years.  How should these companies be valued?  As other posters have pointed out there are many different ways to value a company.  Some investors may be speculating on substantial growth.  Others may be speculating on IPO hype. Amazon did not make a profit until 2003.  Its stock had been around for years before that and even split many times.  If you bought the stock in 1998 and still have it you would be doing quite well.