Are you bewildered by the fluctuations in the stock market. If so, you are not alone. The answer is really simple. The market has nothing to do with the profitability of a firm. It has only to do with the expectations of investors as to what future profitability might be.
Take the meteoric rise and abrupt fall in Merck stock a few years ago. As you probably know Merck is an old established chemical and drug company which has always been profitable. They are a leader in cardiac (Vasotec, Hydrodiuril) and arthritic (Decadron, Indocin) drugs. Their growth has been stabile but not spectacular. So why the sudden changes in their stock.
Well, it seems that Merck researchers have developed a breakthrough drug in the treatment of depression, especially effective in the depression common in adolescent women. This new drug, dihydromethylfluxotine or the brand name proposed, Ufouria, has been undergoing extensive double blind studies in the United States and Sweden and preliminary reports indicated that this was a significant advance in therapy being highly effective without the distressing side effects of related drugs such as Prozac.
News of the preliminary results reached the market. It was the consensus of market analysts that Ufouria would have the same effect on Merck's profits that Viagra had had on Pfizer's. The newsletters all recommended immediate buying and the price of Merck stock soared 220% in less than a week, and continued to rise slowly over the next several months.
Finally enough data was available to petition the Federal Drug Administration to release the drug. In analyzing the results, a strange occurrence was noted. It seems that a large portion of the teen-aged girls treated with Ufouria had abruptly left home to join a convent.
Well, needless to say, the F. D. A. refused to licence Ufouria and stock prices tumbled. In their denial, the F. D. A. cited as the reason that ... Ufouria was habit forming.