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Calculate how much money you will make, not whether the stock is undervalued or overvalued according to some academic model.

AS AN INVESTOR what is the right question to ask? Most ask whether the stock is undervalued or overvalued. The problem with this is that there is no way of properly determining whether a stock is, in fact, undervalued or overvalued. A
There are various academic models for calculating what is called the intrinsic value of a stock. From my extensive experience as a research mathematician all these models, referred to as discount cash flow models, are fatally flawed. There are four areas that bring them down. They are theoretical, contradictory, unstable and untestable.
These problems are a rather technical to explain fully so I will only give the general ideas behind them. Just because some theoretical formula labels a stock as undervalued does not mean that you are going to make money from it. For example, perhaps the price will stay at that level. The models are contradictory since different values are obtained depending on which of the many variations of the models that you use.
They are unstable since insignificantly small changes in the input variables lead to changes of 100 percent or more in the intrinsic value. This means that in instead of the models being objective, they can lead to almost any output that is desired. And finally the models are impractical because they are untestable. Some of the input variables require verification over an infinite number of years. For example, forecasts of growth rates have to be made over not just five or ten years, but extending out forever.
In Conscious Investor we take a completely new approach. First of all, in contrast with the above question on the value of a stock, when you get down to it, the right question is, “What returns can I expect on a stock purchase under reasonable assumptions?” This is what you want to know as an investor. Under reasonable conditions am I likely to make 5 percent or 10 percent or 15 percent or more per year?

This is precisely the criteria that Warren Buffett uses before making an investment. In the annual report of Berkshire Hathaway a few years ago he wrote, “Unless we see a very high probability of at least 10% pre-tax returns, we will sit on the sidelines.”
In other words, Buffett is focusing on expected return, not whether the company is undervalued or overvalued.
Of course, Buffett achieves a much higher return that this. The point is that he aims at a minimum level of 10 percent—his bottom line. By locking this in but leaving open the possibility for higher returns, he achieves his remarkable results.
Implementation using Conscious Investor
Conscious Investor has proprietary tools to enable you to enable you to achieve the goal of calculating expected return. First of all, it has a proprietary tool for measuring the projected profit from an investment. This is measured as a projected return per year. Secondly, this can be done under a precisely controlled margin of safety. You can put in your margin of safety as a worst-case scenario.
Thirdly, it has another proprietary tool for setting target prices so that you know precisely what price you need to pay to get your desired return.
These simple-to-use tools represent a major breakthrough in evaluating the profitability of stock investments. Not only do they allow you to evaluate individual investments but, because of the focus on return, you can immediately compare different investments. Simply choose the one with the highest return calculation.
These tools also allow you to know when to sell by checking whether a new stock has a higher return calculation that one that you may be holding.