14.3: Equity Valuation

We look at Equity Valuation from different perspectives.

All the foregoing valuations may differ from one another. In a perfectly efficient market, observed market prices should equal intrinsic values.

How we value the stock market now and in the future influences major economic and social policy decisions that affect not only investors, but society at large, even the world. If we exaggerate the present and future value of the stock market, then as a society we may invest too much in business start-ups and expansions, and too little in infrastructure, education, and other forms of human capital. If we think the market is worth more than it really is, we may become complacent in funding our pension plans, in maintaining our savings rate, in legislating an improved Social Security system, and in providing other forms of social insurance. We might also lose the opportunity to use our expanding financial technology to devise new solutions to the genuine risks – to our homes, cities, and livelihoods – that we face .

-Irrational Exuberance by Robert J. Shiller