Business Ethics in China

A great company can be a great investment.

Summary

Is the efficient market hypothesis wrong?

Does the article really contradict the EMH?

The preference of the Fortune respondents for stocks of large companies with low book-to-market ratios contrasts sharply with the empirical evidence that indicates that good stocks are stocks of smaIl companies with high book-to-market ratios.

Stock of a growth company not necessarily a growth stock

Fundamental Analysis based on computing the fundamental intrinsic value of a firms stock and comparing that to the market price to determine if the company’s stock is a good investment

A great investment/growth stock is a stock with a higher rate of return that other stocks in the market with similar characteristics.

Achieves superior risk adjusted returns because it is undervalued by the market

If stock undervalued, its price will eventually increase to reflect its true fundamental value and during this period, the stocks realized return will exceed the required return.

Regression to the mean: actual/predicted earnings that are high relative to a group of companies are also likely to be high relative to that company’s true earnings.

Question-> Can earnings go any higher? Statistically speaking, it should regress to the mean?

Freeman and Tse, Fama and French successive earnings regress to the mean. (but due mainly to competition)

By the time a company and its CEO are touted on the cover of a magazine, everyone already knows about them and how wonderful they are. Their virtues are already factored into the share price, leaving it nowhere to go but down. This is known as the efficient market hypothesis.

Usually overeager investors tend to be overly optimistic and inflate the price of a great company.

Many money managers aim to be prudent, herd mentality, overly optimistic -> overpriced stock

By right these investors who buy the stock at overvalued prices should earn a rate of return below the...