How does one best determine ‘value’ in stockmarkets? What forces act to produce the regular material deviations from even the best estimates of such value? These are the key questions that this course seeks to answer. Although utilising historical examples, the course is an educational tool for active investors. So it is a practical, and not just a chronological, history.
In the first module, Andrew Smithers and Stephen Wright (authors of Valuing Wall Street) look at 200 years of data on equity and bond valuations to find which equity valuation criteria work in practice. They find two that – contrary to the teachings of efficient market hypothesis (EMH) – are predictive of future equity market returns. Having established the best guide to fair value for equities, the rest of the course focuses on the forces that cause equities to trade away from fair value.
The two most usually mentioned in this regard are liquidity and psychology. Gordon Pepper (author of Money Credit and Asset Prices and The Liquidity Theory of Asset Prices) and Michael Oliver (co-author of The Liquidity Theory of Asset Prices) teach the unit on liquidity. Gordon and Michael explore the mechanisms through which money affects financial markets and focus on how, in understanding liquidity trades, one’s understanding of financial markets is enhanced.
And so to psychology: our unit on behavioural finance is taught by Herman Brodie, who runs a consultancy company helping financial services companies implement behavioural techniques. Herman’s long experience as a currency trader and provider of advice to financial institutions has given him unique insights into the practical uses of behavioural finance.
Another factor impacting deviation from fair value is inflationary expectations. Peter Warburton looks at the impact of changes in inflation on bonds, bills, equities and equity sectors in 16 different countries over the past 100 years.
Russell Napier concludes the teaching by wrapping up the lessons learnt and seeking to apply them in the current environment. (Additional material for this section, written by Barry Riley and Russell, is included in the course’s text book under The History of Institutional Investment.)