I don’t think I understand how that is consistent with EMH. You mean that P:E predicts high variance but the mean is still priced in correctly so one can’t make a profit just by looking at P:E? A high P:E meaning something like the market saying ‘this company’s earnings will either go way up or way down but I don’t know which’?
Imagine that the stock prices of companies A and B were equal. Last year Company A had low earnings per share while company B had high earnings per share. EMH implies that the market expects that in the future Company A’s earnings will increase relative to Company B’s earnings.
EMH implies that stock prices, not profits, follow random walks.
Say both of our businesses made $1 million this year. Everyone expects your profits to increase but mine to decline. We have the same number of shares of stock outstanding. Your company’s stock price will be a lot higher than mine, giving you a much greater price/earnings ratio reflecting the market’s expectations of increases in your future profits.
I don’t think I understand how that is consistent with EMH. You mean that P:E predicts high variance but the mean is still priced in correctly so one can’t make a profit just by looking at P:E? A high P:E meaning something like the market saying ‘this company’s earnings will either go way up or way down but I don’t know which’?
Imagine that the stock prices of companies A and B were equal. Last year Company A had low earnings per share while company B had high earnings per share. EMH implies that the market expects that in the future Company A’s earnings will increase relative to Company B’s earnings.
EMH implies that stock prices, not profits, follow random walks.
Say both of our businesses made $1 million this year. Everyone expects your profits to increase but mine to decline. We have the same number of shares of stock outstanding. Your company’s stock price will be a lot higher than mine, giving you a much greater price/earnings ratio reflecting the market’s expectations of increases in your future profits.