Posts Tagged ‘stock price volatility’
Posted October 24, 2008on:
Warren Buffet: “Price is what you pay, value is what you get.”
The value of a stock is its dividend stream. (Also see Dividends to rescue in a “Great Depression”.) So far in this bear market, the S&P 500 has tumbled close to 50%. Does that mean dividends will fall by 50% … permanently?!
During the Great Depression, the S&P 500 fell by more than 80%, and yet the discounted value of subsequent dividend stream barely declined (See Chart). In fact, the detrended value of the S&P 500 dividend stream was fairly stable throughout history while the index itself gyrated wildly. This led Yale Professor Robert Shiller to conclude:
Stock prices move too much to be justified by subsequent changes in dividends.
(Also see How Harvard/Yale Endowments invest for bad times.)
Chart: Price volatility compared to “value” volatility, from Robert Shiller’s 1981 paper “Do stock prices move too much to be justified by subsequent changes in dividends?”
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