Sunday, 11 March 2012

Intrinsic economic valuation versus price bidding in the market.

There are over 5,000 stocks listed on the major U.S. stock exchanges.  Each common stock is continuously changing and never stays the same. Thus the number of stock "deals" is unlimited. 

  • You do not have enough time to estimate the intrinsic economic value of every common stock for every moment of every trading session. 
  • The competitive, open-outcry, price-auction markets continuously provide bid and ask price quotations. 
Pricing conventions are used to provide a semblance of rationality in lieu of valuation. These conventions include 

  • price multiples such as the price/earnings, price/book value, price/dividends, price/cash flow, price/sales and other accounting ratios. 
  • Stock pricing conventions vary in applicability and popularity.

Intrinsic economic valuation versus price bidding in the market. 

The stock market participants at the price-setting margin and occasionally the market as a whole are exceedingly irrational. The most important that concerns us is that, in stock market investing, no bidding system can ever replace human judgment and interpretation of the facts based on intelligence, knowledge, and experience.

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