Early in April, I was reading a column in Time magazine entitled, “The Market Mirage,” by Rana Foroohar. Though her column focuses on economics and business, this particular article struck a chord with me. It focused on the current fallacy of using stock prices to determine the value of a company for investment purposes.
Foroohar, who is Time’s assistant managing editor in charge of economics and business, wrote, “Stock prices are usually short-term distractions while true value is built up over time. [Almost] 90 percent of a company’s value is related to its likely cash flow three or more years from the present. Yet, Wall Street analysts, whose opinions help set stock prices, typically base their assessments of a firm on one-year cash-flow projections. What’s more, like all individuals, they have their biases. During boom periods, they tend to believe corporate earnings will be higher than they are during bear markets, regardless of the underlying corporate story.”