Howard Marks: Market Madness: Why Stock Prices Fluctuate More Than Earnings

In his book Mastering the Market Cycle, Howard Marks discusses the madness of markets, and why stock prices fluctuate more than earnings. Here’s an excerpt from the book:

If the market were a disciplined calculator of value based exclusively on company fundamentals, the price of a security wouldn’t fluctuate much more than the issuer’s current earnings and the outlook for earnings in the future.

In fact, the price generally should fluctuate less than earnings, since quarter-to-quarter changes in earnings often even out in the long run and, besides, don’t necessarily reflect actual changes in the company’s long-term potential.

And yet security prices generally fluctuate much more than earnings. The reasons, of course, are largely psychological, emotional and non-fundamental.

Thus price changes exaggerate and overstate fundamental changes.

The truth is that financial facts and figures are only a starting point for market behavior; investor rationality is the exception, not the rule; and the market spends little of its time calmly weighing financial data and setting prices free of emotionality.

You can find a copy of the book here:

Howard Marks – Mastering the Market Cycle