Value investing and non-rationality in financial markets

There is increasing empirical evidence of a growing structural dissociation between the co-movements of companies’ share prices in financial markets and the evolution of their fundamentals.

This price formation environment in the financial markets is a consequence of the progressive change in the relative weight of the different variables that determine decisions to buy and sell assets, with more weight being given by non-rational decisions. By non-rational decisions we mean those that are not based on an in-depth analysis of the economic variables of a company, its environment and the entire social, political and economic context that may affect it.  

This situation in the financial markets is causing a change in the way of understanding asset management. The investment strategy based solely on the search for an intrinsic value of an asset higher than its current market price may be insufficient for the building and management of a portfolio of financial assets. The growing structural dissociation between the co-movements of asset prices and their underlying economic variables may result in the financial markets not capturing this unrecognized intrinsic value in its prices at the desired time and in the expected manner. 

There is a growing body of opinion in both academia and industry that supports this view. The weight of rational investors based on economic fundamentals continues to be very influential in the markets. However, perhaps it is not enough for a strategy and asset management model based solely on this principle of seeking intrinsic value above the current price of an asset to provide comfort for an investor with a time horizon that is not long enough.

José Luís Álvarez – CEO HollyMontt

Did you like it? Share with your friends:

Do you have a comment or question?

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

    Follow us:

    © HollyMontt, All rights reserved.