Two ways to value a stock

Malkiel describes two broad theories of stock prices. The firm-foundation theory says each stock has an intrinsic value based on its future earnings and dividends, and prices tend to return to it. The castle-in-the-air theory says prices depend on what other people will pay, so the trick is to guess what the crowd will want next.

Both theories help explain markets, but the second explains why prices so often run to extremes.