One More Caveat So market prices do seem to have an inherent logic. In each of many recent years, stock prices have been closely related to differential patterns of expected growth as well as to the other “fundamental” valuation influence so important to proponents of te firm-foundation theory. It looks like there may be a […]
Testing the Rules With the rules and caveats in mind, let us take a closer look at stock prices and examine whether the rules seem to conform to actual practices. Let’s start with Rule 1 – the larger the anticipated growth rate, the higher the price of a share.
Determinant 4 : The level of market interest rates The stock market, no matter how much it may think so,does not exist as a world unto itself. Investors should consider how much profit they can obtain elsewhere. Interest rates, if they are high enough, can offer a stable profitable alternative to the stock market. Consider periods […]
Determinant 3: The degree of risk Risk plays an important role in the stock market, no matter what your overeager broker may tell you. There is always a risk – and that’s what makes it so fascinating. Risk also affects the valuation of a stock. Some people think risk is the only aspect of a […]
Determinant 2: The Expected Dividend payout The amount of dividends you receive at each payout – as contrasted to their growth rate – is readily understandable as being an important factor in determining a stock’s price. The higher the dividend payout, other things being equal, the greater the value of the stock. The catch here […]
Determinant 1 : The Expected Growth Rate Most people don’t realize the implications of compound growth on financial decisions. It is often said that the Indian who sold Manhattan Island in 1626 for $24 was rooked by the white man. In fact, he may have been an extremely sharp salesman. Had he put his $24 away […]
Theory of Stock Prices The Firm-Foundation The greatest of all gifts is the power to estimate things at their true worth (La Rochefoucauld, Reflexions; ou sentences et maximes morales).
Some Other Bubbles of the 1980s The late 1980s also had its share of spectacular booms and busts in more prosaic companies, whose concepts caught the fancy of Wall Street. Whereas many investors lost 75 percent of their initial purchase price in the biotech boom, others saw well over 90 per cent of their investment […]
Concepts Conquer Again: The Biotechnology Stocks Bubble What electronics was to the 1960s, biotechnology became to the 1980s. This technology promised to produce a group of products whose uses ranged from the treatment of cancer to the growing of food that would be hardier and more nutritious because it had been genetically modified. In its […]
The Sour Seventies The Nifty Fifty Like generals fighting the last war, War Street’ pros were planning not to repeat the mistakes of the 1960s in the 1970s. No more would they buy small electronics companies or exciting concept stocks. There was a return to reason and with it a return to “sound principles” that […]
The Bubble in Concept Stocks Performance Comes to the Market The next speculative mania came into being during the mid-sixties, when there was heightened competition among mutual funds for the customer’s dollar. In such an atmosphere, it is obvious that it would be easier to sell a fund with stocks in its portfolio that went […]
The Conglomerate Boom Synergy Generates Energy The market shook off its losses and settled down to ponder its next move. It was not too long in coming. Part of the genius of the financial market is that if a product is demanded, it is produced. The product that all investors desired was expected growth in […]
Virtue Of Merger Suppose we have two companies – the Able Circuit Smasher Company, an electronics firm, and Baker Typewriter Company, which makes typewriters. Each has 200,000 shares outstanding. It’s 1965 and both companies have earning of $1 million a year, or $5 per share.. Let’s assume neither business is growing and that, with or […]
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