Modern portfolio theory and efficient market hypothesis propagate that market is efficient as it factors all information available at any point in time; and hence market participants are always rational so that they are ready to accept high risk when rewards are high. Risk is measured in terms of volatility; importance is given to how each asset changes in price relative to how every other asset in the portfolio changes in price. A lot has been written in favour of and against these views. The debate goes on.
I would like to see it in the perspective of business valuation. If we accept these views, it would mean that at all times market valuation of a business is accurate. However, a look at 52-week (this is not a long time at all) high / low prices for any stock would tell us a different story; we see huge discrepancies even in index stocks. Would it mean valuations need to change by the day? If not, is the market fully rational all the time? or perhaps rationalizing those valuations?
If one needs to sight value for money it is to the advantage if one is aware that: 1) there are a number of participants who think that they are always rational and the market is efficient; 2) there are inefficiencies in the market, at least in some stocks, all the time. Inefficiency takes place in the market because of (1) above.
It would be better to devote time and energy to something that is simple and commonsensical than to fancies and complexities such as volatility! Life would then be more enjoyable.
I would like to see it in the perspective of business valuation. If we accept these views, it would mean that at all times market valuation of a business is accurate. However, a look at 52-week (this is not a long time at all) high / low prices for any stock would tell us a different story; we see huge discrepancies even in index stocks. Would it mean valuations need to change by the day? If not, is the market fully rational all the time? or perhaps rationalizing those valuations?
If one needs to sight value for money it is to the advantage if one is aware that: 1) there are a number of participants who think that they are always rational and the market is efficient; 2) there are inefficiencies in the market, at least in some stocks, all the time. Inefficiency takes place in the market because of (1) above.
It would be better to devote time and energy to something that is simple and commonsensical than to fancies and complexities such as volatility! Life would then be more enjoyable.
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