Fundamentalists & their Formulas


QUESTION: Marty, I believe that the traditional way of looking at even value no longer applies. Take the claimed doctrine in finance named the dividend discount model. They assume that the price of a common stock is the present value of its future cash flows discounted by the rate of interest. What happens when interest rates are manipulated to negative? Does any theory or model make any sense any more?

1-When-Genius-FailedANSWER: No. The value of a stock is ABSOLUTELY in no way determined by such a formula. That is up there with the random walk. It has no relationship to market trends whatsoever because markets trade on ANTICIPATION — not on fact.

The bubble is one example. They treated the auto stocks the same during the late 1920s. The South Sea bubble and the Mississippi bubble were the same, as was the Russian Bubble which burst in 1998 and resulted in the collapse of Long-Term Management. The book written on that one was entitled, “When Genius Failed”. These are made up by fundamentalists who waste their time looking for some magic formula that does not exist because it is far more dynamic than they can possibly imagine.