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Evan Davis on... market prices

Updated Thursday, 18th June 2009

The Bottom Line presenter Evan Davis asks why, if it's supposed to be the mechanism for determining value, are market prices so often clearly in the wrong place?

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Markets are funny things aren’t they? On any given day is the price in the market, the stock market, the bond market, the currency market, is the price right or do markets lurch through greed to fear, from high to low and back again virtually never actually telling you what a company, for example, is properly worth?

Now there’s a paradox here, because there are times when everybody seems to share the sense that the market has somehow got the price wrong; that shares are overvalued or undervalued or the pound is too strong or too weak, and yet if we all really believed that then the price should move shouldn’t it?

If we all believe the price is too low we should be quickly buying now in anticipation of the price rising soon, and yet somehow that doesn’t happen, you have these sustained periods of mispricing. Very hard to say what’s going on there but it might be that the great economist Keynes had it right.

You see, if I think the market is wrong and I trade against the market I stand to make money in the long term but possibly lose money in the short term if the market stays wrong for a while, and it was Keynes who said that the market can remain wrong for longer then you remain solvent, and it’s the clue to why you get these sustained periods of mispricing.

It’s that voting against the market, betting against the market can be a losing strategy if you run out of money before the market comes round eventually and inevitably to the right way of thinking.

Well that’s just one view about markets, but you can join in the debate with the Open University.

 

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