Generally, the fundamental value of a stock is determined by one of two things. It can be defined by the net present value of the future dividends of the stock. Alternately, it can be determined by the per-share liquidation value of the company’s assets (after creditors are paid). Which one applies or what mix depends on whether and how the company will be liquidated.
The rest is a mix of market psychology and adjustments for risk/uncertainty.
A big wrinkle is that the many investors look for companies with major earnings growth potential. As a result, most traded companies try to give the appearance of major earnings growth potential. One way to signal growth potential is to allocate little or no cash to dividends, because using the cash for expansion (or for activities that superficially resemble expansion) signals that the company has strong growth opportunities. If investors believe this signal, then the stock price rises from its fair value as an existing business to its expected fair value as a much bigger company in the future. The management rewards everyone with bonuses and all is good, until the future arrives disappoints everyone.
I was going for a peacock analogy, but perhaps lemmings would be more appropriate.
“”Technical analysis bases decisions on past results. EMH, however, believes past results cannot be used to outperform the market. As a result, EMH negates the use of technical analysis as a means to generate investment returns.
With respect to fundamental analysis, the EMH also states that all publicly available information is reflected in security prices and as such, abnormal returns are not achievable through the use of this information. This negates the use of fundamental analysis as a means to generate investment returns.”″
Doug and Jeremy:
Generally, the fundamental value of a stock is determined by one of two things. It can be defined by the net present value of the future dividends of the stock. Alternately, it can be determined by the per-share liquidation value of the company’s assets (after creditors are paid). Which one applies or what mix depends on whether and how the company will be liquidated.
The rest is a mix of market psychology and adjustments for risk/uncertainty.
A big wrinkle is that the many investors look for companies with major earnings growth potential. As a result, most traded companies try to give the appearance of major earnings growth potential. One way to signal growth potential is to allocate little or no cash to dividends, because using the cash for expansion (or for activities that superficially resemble expansion) signals that the company has strong growth opportunities. If investors believe this signal, then the stock price rises from its fair value as an existing business to its expected fair value as a much bigger company in the future. The management rewards everyone with bonuses and all is good, until the future arrives disappoints everyone.
I was going for a peacock analogy, but perhaps lemmings would be more appropriate.
“”Technical analysis bases decisions on past results. EMH, however, believes past results cannot be used to outperform the market. As a result, EMH negates the use of technical analysis as a means to generate investment returns.
With respect to fundamental analysis, the EMH also states that all publicly available information is reflected in security prices and as such, abnormal returns are not achievable through the use of this information. This negates the use of fundamental analysis as a means to generate investment returns.”″