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Fundamental Valuation

What fundamental measures of business success best indicate the value of individual stocks and the aggregate stock market? How can investors apply these measures to estimate valuations and identify misvaluations? These blog entries address valuation based on accounting fundamentals, including the conventional value premium.

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Is Irrational Exuberance Over Yet?

In the early 2001 update of their 1998 paper entitled “Valuation Ratios and the Long-Run Stock Market Outlook: An Update”, John Campbell and Robert Shiller focus on mean reversion of two valuation ratios, price-earnings and dividend-price, as key predictors of future stock market performance. The authors determine that mean reversions of these ratios occurs through stock price changes, not earnings or dividend changes. At the time of the update, they note that “these ratios imply a stronger case for a poor stock market outlook than has ever been seen before.” Keep Reading

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