The single greatest mistake investors make is to extrapolate recent history out into the future. They take the financial returns of the past 5 days or 5 years or even 50 years and assume the next few days or years will look just the same without any consideration for the historical context or conditions that provided for those returns.
They forget that, while ‘history may rhyme, it doesn’t repeat itself’ (Twain). Or that, “the only thing that is constant is change” (Heraclitus). These two famous quotes apply to the financial markets as much as anything.
Ignoring these truths and instead simply extrapolating is why investors are suckered into pouring money into the stock market only after a run of great performance. They believe that the recent gains are about to repeat to their great benefit when they should be thinking about what conditions allowed for those gains to take place and analyzing whether they are still relevant or not. Continue reading “History may rhyme it doesn’t repeat itself”
Very common statement from the market analysts these days for the Indian stock market. India Overvalued but the rally will continue. Although based on valuation metrics, Indian equities are now trading at a significant premium to stocks in other EM countries some analyst claim this too.
We have consistently outperformed the market! … Sensex is now overvalued.
“The stock market is overvalued.” “The stock market is undervalued.”
Which one of these statements is true? Well I don’t know. May be both
Thanks to quirks of the most popular way of measuring a stock’s valuation: the price/earnings ratio.
While no one disagrees about what the “P” is when calculating the ratio, there is no consensus on how to Continue reading “Are Markets Overvalued?”
Lets pick up from yesterday post. Empirical tests of the efficiency of capital markets have examined the extent to which the prices of securities reflect relevant information, i.e. pricing efficiency, because of lack of data for testing allocational and operational efficiency. Many studies have examined the extent to which it is possible to make abnormal return in excess of expected returns.
Markets are said to be “weak form efficient” if current security price reflect all past movements of share prices. It means it is not possible to make Continue reading “Market Efficiency & its forms”