And when, as happens at some point in all bubbles, the price of the stock no longer reflects the value of the underlying cash flows
Even without bubbles it's astonishing how rarely stock prices reflect trading fundamentals.
But usually they reflect at least some tenuous approximation of the fundamentals. You don't get a company with a hundred million in assets and liabilities of 90 million with a market cap of two hundred million unless you have a bubble. It might have a market cap of a fifteen million one day and eight million the next, because stockholders can't decide on how to value the hard-to-value bits on the balance sheet. But there are limits to the craziness in normal times.
P/E ratios, for instance, have historically not been all over the place, except in the run-up to a panic.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
