In a market driven by momentum and rising relative valuations, the true value of a company becomes meaningless; the game is to identify the companies that are cheap on a relative basis. That is the focus of sell-side research, which has been justifying all of its buy recommendations and gaudy price targets on the basis of comparable P/S ratios. To be fair, we have fallen prey to this logic before as well. And in times of momentum frenzy, it can be an effective way to trade profitably. But we are no longer in such times, and now the relative valuation game becomes a vicious cycle, with lower valuations for one stock arguing for lower valuations for the entire sector. To find a bottom to such a sell-off, you have to get back to basics: what is the true value of a company? A company is worth the discounted present value of future cash flow. Put simply, a company is worth the cash its business will spin off in the future, discounted to today's value using an appropriate discount factor. Making such calculations is by no means easy, and it is certainly not as easy as saying the company X should trade up to $100 from $50 so that its P/S ratio will match that of company Y. But in a market that has turned ugly, as today's tech market has, discounted cash flow analysis is the only way to have confidence in your investment.
"That was the so-called Black Thursday, October 24, 1929, when the Dow had fallen 12.9% within the day but recovered substantially before the end of trading, so that the closing average was down only 2.1% from the preceeding close."