Modern theories of investment pricing

Abstract

Methods of fundamental analysis, such as that explained in chapter 6, which attempt to assess the intrinsic worth of a security and therefore identify underpriced or overpriced stock, have increasingly been criticised as irrelevant and a waste of time. It has been justifiably pointed out that the intrinsic worth of a stock is just one of several considerations influencing demand and supply flows, and others — particularly psychological factors — are also relevant. After all, it is not strictly the worth of a share that influences demand and supply, it is how valuable and attractive investors consider it to be. However, more significant than that is a growing belief in the efficiency of the stock market in correctly pricing stocks, thereby making fundamental analysis largely redundant and futile.