powayseller wrote:
“I don’t buy it though. Why did homebuilders go up recently? Why are some stocks trading at PE/s over 15? Why was there even a tech bubble, with stocks earning no profit trading at high prices?”
Stock prices generally project future earnings, not just current and trailing earnings (which is where the P/E value comes from). Unfortunately, accurately predicting growth and future earnings is difficult. Most stocks that trade at high P/Es have good growth potentials. The tech bubble was a combination of unrealistic growth expectations and “irrational exhuberance”.
Companies do attempt to manipulate their stock prices. I read one study (wish I could cite it) that said something like 60% of actual earnings reports beat the market estimates. From that we can conclude one of two things: Analysts are bad at their job, or companies will do what they can to “juice” the numbers and boost the stock price a bit. The fact earnings tend to skew to the positive suggests the latter is probably true.
powayseller wrote:
“We also have shorting and options and all kinds of trading which further distorts the true value, as those people treat the market like a casino table, rather than being true investors which pay for a stock what they think it is worth. They are buying only for short term holding to play small changes in the price.
Maybe markets were efficient before all the games and the before the speculators took over.
To me, the stock market does not reflect the accurate value of a company’s stock. It just shows what a bunch of speculators are willing to game it for, at this moment.”
Short term traders really only affect the short term price of stocks. Long term investors can still buy and hold the companies they feel are undervalued and are fundamentally strong.
Opportunities come when “Mr. Market” overreacts to good or bad news, or neglects a solid company or sector that doesn’t happen to be in vogue at the moment. But overall, I don’t think you will see a lot of ridiculously mispriced stocks.
