What Drives Stock Prices? – A Look Into the Underlying Forces That Determine How Much Money Investors Make From Their Stocks
Recent years have seen a surge of speculation that, by some measures, looks similar to the dot-com era. Generally speaking, most investors have made a lot of money, but a few folks have generated absurd returns on what is essentially a non-sustainable momentum trade that, when it turns – and I believe it will – is not likely to end well. In any event, to alleviate my own concern for my fellow man, similar to what I did in the dot-com era and the run-up to the real estate hype prior to the Great Recession, I feel it is important to remind everyone that, at the end of the day, the mechanics that drive wealth accumulation through ownership of stock can be broken down into constituent parts. If you expressly identify those parts, it’s much easier to confront your assumptions and test them for reasonableness; to separate speculation from investment.