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Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement by Richard Lehman

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Chapter 3. Subjective Value

People are largely concerned, not with making superior long term forecasts of the profitable yield on an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.

John Maynard Keynes

If fundamental analysis by itself is unable to provide valuations for stocks that explain the changing prices determined by the market, then we need to adopt a different method of price valuation, one that incorporates significant value from behavioral influences. This chapter opens a door to an approach to stock valuation that combines fundamental economic analysis with a subjective component to account for behavioral factors.

Marketing and advertising people spend untold amounts of time and money specifically trying to formulate an impression in our minds about companies and their products. They exploit even the subtlest differences to distinguish themselves from competitors. They use slogans, images, celebrities, and even specific colors to create impressions that will steer consumers subconsciously toward their products. To think that we as investors can set all that aside and focus purely on financials when we buy stocks is to ignore a basic and oft-proven fact about human behavior: that we are influenced by such advertising more than we might want to believe, and we cannot turn those impressions off like a switch.

That doesn't mean we don't consider the financial or investment opportunity ...

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