If you are the one, always scared of the big terms like equity valuations this article may help you. I will take you through one analogy .
Just imagine you are in the final year of your college and placement season is on, your friend and you are not allowed to sit in placements, so you decided to make some money other way round. Your friend and you decided to bet that who’s going to do better in life in next 10 years among all the students sitting for placements. Whom are you going to bet on? What would be your criteria? Your answer perhaps may be one of the following.
1. The students who are the toppers in class
2. The students who have great achievements in extracurricular
3. If lucky you will find someone who satisfies both qualities
So basically, you chose blue chips of the class, based on their past performance. Did it cross your mind of choosing someone who doesn’t fit in the above-mentioned criterion, maybe not. If all your bets have the same reward associated (Doesn’t matter which student, you chose you will get the same money). But what if your friend is intelligent like you and every student is already ranked on the basis of above 3 qualities (Higher the rank better the student) and you get the highest money for betting on the lowest ranked student and vice versa.
Here the real problem of the financial world starts, now your focus shifts to choose a student who can give you the max. on your bet but with the risk that you can manage or maybe you would like to distribute your bets among multiple students, so ultimately you would not lose money.
The stock market works in the same way if everyone knows you are a performer its already priced in and if you have never performed in past, you will not get high valuations, but the biggest money will be made on someone who has not performed in the past and suddenly he/she starts performing.