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Stock Valuation Failures

Most investors start to celebrate when the conditions of a bull market are observed. However, they may be too rushing in their positive expectations because the history is full of examples when bull markets have not been so beneficial.

One of these examples is the case of Michael Metz. He is the ex-strategist concerning the stock market working for Oppenheimer & Co. He has become famous for his valuation methods and models. However, they proved to be not that efficient and successful in the mid-1990s. This happened because of the taking off of the stocks, which greatly hurt his pundit image.

When in May 1995 the Dow increased its value by 15%, Metz advised the selling of stocks. However, he was wrong since it continued to rise in the years to come.

On the other hand, there were like-minded who considered irrational exuberance was experienced by stocks. One of them was Alan Greenspan, who was the chairman of the Federal Reserve. The S&P hit a record increase of over 80% over the following two-and-a-half years.

So, no matter how experienced and knowledgeable you consider yourself in stock valuation, you should keep in mind that it is characterized to a high degree of uncertainty. Most of valuation strategists tend to assume that all things are being equal. Additionally, they base their valuation on the assumption that past performance is a sign for future one. However, the dynamics of the market and the uniqueness of each situation lead to the lack of a general formula for successful predictions.

What we recommend is that you valuate stocks against as much criteria as possible. You should also adjust your assumptions with every change in conditions. You should also have in mind that the economy may surprise you in many ways that most of the times are unpredictable.

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