No. of Recommendations: 26
From the UK Fool;
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Once upon a time there was a young trader, who decided to go for a walk in the Wild Market.
Confused, he put on his little red braces, and went off to see his grandmother, who could be found sipping her gin at the Old Bull and Bear.
"Grandmother, what a big portfolio you have!"
"All the better to pay for my Gin my dear.."
"Grandmother, what huge experience you have"
"All the better to gobble up young whippersnappers like you!"
"Grandmother, what is the true valuation of a company?"
Granny sighed, and put down her gin, and peered at him through her pince-nez, and said..
"Well...in the old days, we used to say that it was worth whatever price its dividend paid relative to bond yields times the perceived risk factor of the stock itself"
"But Granny, that means that nearly every stock in your portfolio is overvalued by several times over - and look, some have no dividends at all! Surely there must be another answer?"
Granny took another swig of gin, and sighed again.
"Well a stock is always worth less than its *potential* future earnings, in the most optimistic light, averaged out over a reasonable time span, one should be able to say that at least."

"But Granny, that means that most of the stocks in your portfolio are potentially worth far *more* than the current price! I still don't see it"
Granny muttered something that sounded like "I'm banking on it" and a great waft of gin soaked dog-breath washed over Little Red Braces, and the Granny spoke up sharply..
"That's because you are young and foolish, and assume that the market is like me, old and wise"
"I don't understand: What is the true value of a stock?"
Granny grinned and Little Red Braces saw a huge row of very un granny like teeth...and felt quite uncomfortable.
"Well Little Red Braces, a stock is worth what someone else will pay me to buy it. No more no less"
"But...but..but that means that it can be worth anything at all depending on..."
"..Exactly my dear, Sentiment. What ever the other players in the game think they can sell it for, less the amount of greed they wish to mark it up by, plus the amount of fear the man selling it has discounted its value by".
"..But...but that is insane! What are all these analysts and pundits and experts all doing then!"
"Manipulating greed and fear, to drive the prices up and down, so that us old hands, who have no fear, and no greed, but are simply here to support a gin habit, can watch the tides of human emotion and buy and sell accordingly!"
"But Granny, we might as well just be playing poker!"
Granny sighed, and cracked the top off another gin bottle, and thought for a moment...
"Dear boy" she said "You might make a trader yet".
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