Why Should Equities Be Fairly Valued?

By Joe Wiggins of Behavioural Investment

Investors spend a great deal of time thinking, writing and talking about the fair or intrinsic value of equities, whether it be an entire market or individual company. This is a critical issue. There is probably no greater determinant of the long-run returns we make than the price that we pay. The obvious challenge is ascertaining what fair value is – how do we estimate the current worth of cash flows we expect to receive in the future?  If this task is not difficult enough, there is another problem. Even if we knew the fair value, what would we do about it?  There is no reason to expect that equities should be fairly valued today or tomorrow.

When we discuss equities being cheap or expensive the underlying view often seems to be that at some point ‘the market’ will identify this anomaly, creating the opportunity to profit from a revaluation. The glaring assumption here is that the majority of participants are interested in the same thing. It presumes that most investors are engaged in an effort to calculate the fair value of an asset, they are just coming up with different answers. This is some distance from reality. Investors have a multitude of motives, approaches, and philosophies, many of them with a time horizon far shorter than one which would make defining fair value relevant…..Read more