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The Essential P/E: Understanding the stock market through the price-earnings ratio by Keith Anderson

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Chapter 5. Value Investing

As anybody who has traded on the stock market for any period of time will tell you, the prices of shares seem to gyrate much more wildly than their usually stable series of dividend payments would suggest. This was quantified by economist Robert Shiller in 1981, who estimated that prices vary 13 times as much as you would expect based on the variability of their dividend payouts. Trying to explain this inconvenient fact was one of the spurs to the field of behavioural finance that has grown up since. Behavioural finance tries to apply ideas from psychology to explain some of the otherwise inexplicable things we observe in financial markets. Surely it should be possible to identify shares that are in an irrational ...

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