How to Value Any Investment: A Beginner's Framework

Valuing investments sounds complicated, but the core principles are simple. This beginner-friendly framework works for stocks, crypto, and real estate.

Every investment is worth the present value of all future cash flows it will produce. This sounds complex, but the core idea is simple: you are buying the right to a future stream of money. The question is whether the current price is fair for that future stream.

Stocks: Price-to-Earnings

• P/E ratio: stock price divided by annual earnings per share
• S&P 500 historical average P/E: 15–20x earnings
• P/E above 30: growth expected — justified if growth materialises, expensive if it doesn't
• P/E below 12: value territory — may be cheap for a reason, investigate why
• PEG ratio (P/E divided by growth) <1 suggests undervaluation

Crypto: Network Metrics

• NVT ratio: network value to transaction volume — high means overvalued relative to activity
• MVRV: market value to realised value — above 3.5 historically precedes corrections
• Stock-to-flow: models Bitcoin scarcity based on annual supply reduction
• Revenue multiples for DeFi protocols: protocol fees divided by token market cap

Real Estate: Rental Yield

Gross rental yield = annual rent / property purchase price. Net yield subtracts taxes, maintenance, and void periods (typically 20–30% deduction). A net yield above 5–6% is generally good in most markets. Yields below 3% in expensive cities mean you are betting on capital appreciation rather than income — a more speculative position.