Bruwin,
So true, and I can relate to what you are saying. Yet, the valuations accorded to KO and MSFT (and numerous other assets) during Feb/Mar 2009 pretty much reflected the broad view of the future economic activity and required risk premium. Both factors depressed the asset prices then. While in hindsight those numbers might look absurd, recall that these were derived using the exact same methodology - discounting the sum total of expected future earnings. The potential appeared dim then, and appears brighter now - but the process remains as usual. Stout souls bought and the fearful sold, but that's totally besides the point.
Some analysts say buy and some analysts using the same process say sell (same stock same time horizon). So, which application of this same G&D methodology shall one trust?
So they are all different theories. The assessed value depends on one's time horizon and the various proxies used for future (time horizon) expectations. All the while, there is a growing tonnage of literature on behavioral economics and distortions caused by taxes and brokerage commissions - often at odds with the neat algebraic versions. Theory of finance, however, is anything but static - take for example the use of stochastic calculus in everyday finance today. The cups-n-handles and whatnots use game theory, gain maximization, information asymmetry and such - and what would be the exact case against them?
Regards
Dinesh |
