Prudent investors understand the difference between fact and opinion. Past history deals with facts. The future deals with opinioins.
The stock market is like any other market where buyers and sellers transact to arrive at a price they consider to be fair. Through the competition of its participants, the market acts as an effective information processing machine in which the knowledge and expectations of investors are quickly incorporated into today’s prices.
While information incorporated by the market drives stock prices to fair value, stocks may have different expected returns. In aggregate, the market applies a different discount rate to each stock.
Using the information contained in security prices and firm characteristics, we can systematically identify differences in expected returns.
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