Thursday, December 27, 2012

A mockery of market prices and relative valuation

During the NASDAQ Bubble of 2000, when investors used relative valuation models to justify the prices of stocks such as Yahoo and Cisco, straightforward absolute valuation models showed that these companies -- and many others -- had to double their adjusted earnings every year for several years to justify their then current market prices. But this did not seem like something that had even the remotest chance of happening. In effect, absolute valuation made a mockery of market prices and relative valuation.

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