[quote=davelj]Occasionally, stock prices ARE linked to the underlying fundamentals of the company. The problem, of course, is that this is the exception rather than the rule.
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as you can see from the performance of US stocks in aggregate over the last 130 years, stocks can spend long periods of time – up to 10 years in some cases – dramatically over- and under-valued.[/quote]
I absolutely agree! With the qualification that I often wonder if we have reached a place of permanently disconnected stock prices. Seems to me stock prices left fundamentals sometime in the early ’90’s and haven’t been there since. Are they ever going to return to being based on fundamentals? Not sure which way I’d vote on that.
[quote=davelj][quote=XBoxBoy]
Typically, when a company buys another company and then lays off a bunch of workers, that stock will bounce. [/quote]
This is incorrect. Typically when one company buys another – regardless of proposed “synergies” – the acquirer’s stock goes down. This occurs in at least 80% of cases and there are reams of academic studies supporting this.
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OCCASIONALLY, the stock of the acquirer will go up when a merger or acquisition is announced. But this is the exception rather than the rule.[/quote]
Dave, I don’t know how often this happens, and you could easily be right that it’s only 20% of the time whereas 80% of the time the aquiring companies stock goes down. I don’t watch many individual stocks, only those in my industry, video games. From what I see, it is common for a publisher’s stock to bounce up when they buy a developer. The joke of this is that usually three or four years later the publisher closes the developer, having gotten nothing out of them but having successfully run the developer into the ground.
I think the interesting question would be, given that sometimes the acquiring companies stock goes up and sometimes it goes down, what percent of the time is this movement a good predictor of the success of the merger? In other words, does that stock price movement correlate to the actual improvement or deterioration in acquiring company fundamentals? My hunch is that there is very little correlation, and that this is another example of stock prices not being based on the businesses fundamentals but instead based on the perceptions of traders.
