The Westpac Banking Corp (ASX: WBC) share price has run a bit too hard for my liking.
WBC share price
Over a long period, Westpac shares have performed exceptionally well for investors, with both dividends and capital gains.
In fact, over the past 20 years, Westpac shares have doubled the return of the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
The difference between price and value
Every good long-term investor knows there is a difference between price and value.
For example, Westpac shares are priced around $32. But what are they worth?
Stock valuation can get complicated, I discuss the topic here.
But, basically, we want to make an investment when the valuation of a share is less than the price. For example, an iPhone costs $1,200 (price). You would only buy one if you valued it more than $1,200. The same principle applies in finance.
But stock valuation is an art, so while we can say definitively that the price for Westpac shares is $32 we cannot guarantee its valuation.
Therefore, when we conduct our valuation we adjust it for something called the 'margin of error'.
For example, some of the best investors in the world say they need a stock to be priced at least 30% below the valuation. A 30% margin for error, at least. Many investors would say the gap needs to be even more than that.
Westpac's value
One simple way you can get a sense of the valuation of a company like Westpac is by reading the annual reports and various industry reports to get a sense of its growth potential, risks and weaknesses.
Recently, I outlined seven reasons to hold big bank shares in a portfolio — and 14 reasons to sell.
Ultimately, I do not believe Westpac shares are worth 30% more than their current price. Therefore, using strict valuation criteria they are not a buy in my book.
In fact, they would need to fall considerably below $30 to be worthy of a spot in my long-term portfolio.
Until such time that its valuation improves, I'll focus on the other 20,000 plus shares available on local and international markets.
