Herd mentality

I my quest to fnid out the ways and means of the stock market, I came across an interesting article. The pink section of today's DNA told a story. Robert P Miles, the Warren Buffet investment advisor had, in a conference, asked people to bid for a business that would generate Re 1 every year for 10 years. And people started bidding. Herd mentality followed, and raised the tag to Rs 1000. this clearly shows how irrational the stock market can be. And this is how stocks tend to get overvalued.

The rational method of evaluation of the stock is the discounted cash flow method, an inevitable part of the finance basics. A cash flow of Re 1 for 10 years would bring the present value to nothing more than Rs 6.14 (taking 10% discounting rate) But the people did raise the price!!