Mark Harries: Irrational exuberance - sentiment vs valuation

At its core, investing is about increasing wealth. During a period of cyclical upheaval and mean reversion - generously spiced with global political change - it can be healthy to remind ourselves what drives returns on a fundamental level.

This is perhaps even more the case when we are faced with a market driven by investments that we simply do not understand, e.g. banks.  The down-to-earth financial journalist, Morgan Housel, presents the formula for future stock returns as follows:  Future Returns = Dividend Yield + Earnings Growth +/- Change in Earnings Multiple It's a pretty simple concept. If a company you own pays a 4% dividend yield and grows its earnings by 6%, then you should expect a 10% total return next year - as long as the P/E ratio remains the same.  In the long term, then, returns tend to correlate...