Fundamental analysts usually begin any investigation of buying and selling opportunities by attempting to determine fair value for a wide-range of assets. They then usually decide to sell those assets which are trading the most above their respective fair values in percentage terms, while purchasing assets which are trading at their greatest percentages below fair value. In the long run, this can be an effective strategy. Giving significant weighting to behavioral measures such as extreme fund flows, unusually optimistic or pessimistic media coverage, and analysts’/advisors’/newsletter writers’ sentiment is useful. Adding historically reliable indicators including insider activity, traders’ commitments, and other signals is even better.
All of these sensible measures tend to avoid the following fascinating question: why is it that assets so rarely seem to be trading near fair value? Why do you so frequently hear that “the market is crazy” or “the market doesn’t behave the way it used to”? Did the market ever behave the way it allegedly had done when your parents or your grandparents were trading?
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