Howard Marks: Market Madness: Why Stock Prices Fluctuate More Than Earnings

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In his book Mastering the Market Cycle, Howard Marks discusses the madness of markets, and why stock prices fluctuate more than earnings. Here’s an excerpt from the book:

If the market were a disciplined calculator of value based exclusively on company fundamentals, the price of a security wouldn’t fluctuate much more than the issuer’s current earnings and the outlook for earnings in the future.

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In fact, the price generally should fluctuate less than earnings, since quarter-to-quarter changes in earnings often even out in the long run and, besides, don’t necessarily reflect actual changes in the company’s long-term potential.

And yet security prices generally fluctuate much more than earnings. The reasons, of course, are largely psychological, emotional and non-fundamental.

Thus price changes exaggerate and overstate fundamental changes.

The truth is that financial facts and figures are only a starting point for market behavior; investor rationality is the exception, not the rule; and the market spends little of its time calmly weighing financial data and setting prices free of emotionality.

You can find a copy of the book here:

Howard Marks – Mastering the Market Cycle

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Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.