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Author: 3Star Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Re: Choosing RM Candidates Date: 10/31/2001 1:13 PM
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I said earlier :

However, if EMT was ever true, there would not be a so called "bubble" and it "collapse" a few weeks/months later.

thedumbox replied :

Why not? You mention Fama -- do have some citation to his work where he says that are impossible? Or anybody else who's working in EMT?

People seem to be under this misapprehension that EMT says that all stocks trade at their intrinsic value at all times.


Well, I went picking some definitions from the gourou himself. Here is one :

(...)In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.

Fama is not stupid, I will never say this. However, during the "bubble" mentionned above, there were far too many cases where stocks were being exchanged at values far beyond their intrinsic values. I am not even talking of those numerous "stupid" IPO's highly recommanded by many so called analyts that are also part of the bubble.

To me, this situation is sufficient to look at the EMT theroy (as defined in the document below) as a general concept that does not apply to many individual cases. Of course, I will not involve myself into performing a scientific analysis to prouve it wrong. Of course also, as mentionned by Fama himself, intresic value is not a precise concept and the latter changes as informations become available and also, varies with the quality of the analyst themselves.

My interpretion with Cisco's case in particular is --at times prior to the bubble's collapse-- that it's stock was being traded at levels far beyond it's intresic value. This said especially if you paid attention to the various "unreasonnable and recurrent" stock option plans held by Cisco and many other companies forming the bubble at the time. However, it sems that those stock option plans are often ignored by the markets.

The document worth reading : http://gsb.uchicago.edu/pdf/sp16.pdf

Back to the thread, many of the companies part of RM group holds what I call a "unreasonnable and recurrent" stock option plan. Many of the RM's stock have encountered an important devaluation. It would be intheresting to add precisions at this point.

Pierre
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