Prices and Emotions

Aug 2015 //
Behavioral Finance

The higher Mr. Market’s optimism, the higher [a company’s] near-term stock price, and the lower its future returns.  Indeed, if the initial price is sufficiently high, the stock’s future returns could be negative. ... Simply put, over-optimism is a bad thing for future returns.  On the other hand, near-term over-pessimism is a good thing for those who can maintain a focus on the long term.  Indeed, other factors equal, the greater the near-term pessimism, the lower the stock price in relation to intrinsic value, and the better our future returns.