The Auction Marketplace
The stock market operates on risk. Some people are rewarded by taking the right risks at the right time, while others make the wrong move and lose. However, while risk is the real determining factor, the public image of the market is that forecasting makes the real difference.
An investment strategy based on the fundamentals can be more profitable than average if you understand that for whatever reasons, the market has undervalued a company or its industry. The selection of decision-making strategies based on fundamentals and careful observation of the market may involve the combined strategy of looking for undervalued securities, with a thorough and logical program of fundamental analysis. Are the two compatible? They may be at times, but not always. For example, there may be fundamental reasons that some companies are undervalued by the market. Remember that in the auction marketplace, it is not today's value that counts for much; rather, it is the perception of potential future value that determines the popularity of one stock over another. Because perceptions drive the market, it is necessary to look for the source of perceptions. Invariably, long-term perceptions grow from the fundamentals.
KEY POINT
The important perceptions—those that operate over the long term—are outgrowths of underlying faith in the fundamentals.

It is not inaccurate to define market perception as a form of broad wisdom. You might not be able to find a particular analyst who can pronounce what the market believes about a stock. Perception is an unspoken judgment, passed on a stock by the market as a whole. It is wisdom without consciousness. Thus, a comparison between the workings of the auction market—driven by perception and short-term forecasting—and the traditional beliefs about fundamentals and future value, will not always yield complete consistency. However, you will probably come to the conclusion that perceptions accurately represent the broad wisdom that comes from a study of fundamental indicators.
You may equate perceptions with fundamentals or accept perceptions as a form of general fundamental understanding about a company's financial strength. But that is only part of the equation. A perception may be held by a person who knows nothing about fundamentals, does not review financial statements, and does not trust historical information. Such a person does not have an instinctive grasp of the fundamentals. However, he does have an instinctive awareness of the perceptions around him, and he has been able to pick up that sense and apply it to the stock in question. That is how herd mentality is born.
KEY POINT
Perceptions might come from analysis or from duplicating the attitudes and beliefs of others. It is difficult to tell just by observing, because perceptions look alike regardless of their source.
When investors form opinions based on their reading of perceptions around them, those opinions may be correct, but they are based on what others think. In the long run, successful investors usually end up either thinking for themselves or changing their source of information or opinion.