It seems like many people think of stocks simply in terms of their
prices, as if stocks are just numbers on a screen that go up or
down. Perhaps that's a useful simplification for day traders, but
for long-term investors the reality is different: a stock represents
fractional ownership of a real-world business, including a share of
all earnings generated by that business in the future.
Those long-term earnings are the biggest component of the stock
market's value, so it's obviously critical to have a good estimate
of what they might be. Fortunately, this is pretty straightforward
at the economy-wide level, because earnings tend to grow at a
remarkably consistent pace over the long run. And yet, stock prices
vary much more wildly than those long-term fundamental prospects
would suggest they should.
Below, we will discuss why this is, the implications of these facts,
the tremendous advantage they can confer to patient and level-headed
investors, and why it's very unlikely that "this time is different." (read more)