DEAR EDITOR: I am an investor. Experts say valuation does not matter. Please tell me the truth; does valuation matter?
VIRGINIA O’HANLON.
115 WEST NINETY-FIFTH STREET.
VIRGINIA, they are wrong. For the past 60 years, finance experts have been telling the world that the important activity addressed by valuation – trying to understand if a company is trading above or below its intrinsic value is irrelevant. Instead, academic theories and self-interested marketing by many firms preach repeatedly that it is much better to just buy stocks with some combination of attractive accounting ratios such as high: book to price, earnings to price, sales to price, among others. Yet it is clear, market prices over and under react but with time find their proper intrinsic values.
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