FIN 260 Lecture Notes - Lecture 58: Stock Market, Warren Buffett, Herding
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Looks for companies where he can understand how they make money: stays away from enron-type companies, invests in coca-cola. Looks for companies w/ real competitive advantage: not a lot of other competitors, those where there won"t be many other competitors, stays away from airlines, buys freight railroads. Q: how do we find out if the stock market is over/under valued: campbell-shiller method, gives a good idea as to whether stock market is undervalued or overvalued by the actual stock market. If you find the stock is undervalued, you should buy the stock. If you find the stock is overvalued, you should sell (or not expect a high return in the future): take the price of standard & poor"s 5(cid:882)(cid:882) divided by the (cid:883)(cid:882)-year average earnings. P/e10: take this measure at beginning of january for every year since sp index has been calculated, then measure the future changes in the sp500 index.
