Economic Basis
The efficient market theory predicts that all known information about the probable future returns of an investment is immediately reflected in prices. An investor who purchases a stock based on future predictions should be aware that such possibilities are likely already priced into the stock.Impact
A stock that is priced for perfection may not go up when good news such as strong earnings occur because such results were already expected. In some cases, a stock that is priced for perfection can fall dramatically on slightly negative news as the firm may have a far higher price than similar firms with a track record of mixed performance.Example
At the start of a year, economists and investment pundits expect a particular economy to grow at 5%. Stocks rise dramatically early in the year to reflect this prediction. This particular economy hasn't grown at 5% for more than 30 years and this widespread prediction expects things to go very well. Mid-year it becomes clear that growth will come in closer to 3% and stocks decline significantly in response.| Overview: Priced For Perfection | ||
Type | ||
Definition | Investments that achieve a high valuation based on optimistic expectations for future earnings. | |
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