Is Valuation Meaningless?

from the how-to-misread-studies dept

It seems you don’t really need to understand finance to make fun of a finance study these days. Over at Red Herring they’re wondering about a study saying that valuation is basically meaningless in predicting stock performance. Of course, they appear to look at aggregate data, which is absolutely useless in a situation like this. Especially following the collapse of the bubble when valuations were completely out of whack, looking at aggregate valuation data is going to tell you absolutely nothing. Anyway, valuation, by itself, shouldn’t tell you much about stock performance anyway. Valuation is a “snapshot” – it tells you simply what the stock is valued at right now. It doesn’t have any predictive value whatsoever, by itself. In combination with plenty of other information it can be useful in making judgments on a company – but, by itself, it’s simply not a predictive number.

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