4 ms·

Here is some enlightening story: Tourist walks through some distant mountain village and meets the villager shouting "My dog is for sale". So the tourist asks

by mamon 11y ago

Here is some enlightening story: Tourist walks through some distant mountain village and meets the villager shouting "My dog is for sale". So the tourist asks "How much for your dog?" "$1 million", villager replies. Tourist just sighs and continues his walk. Later the same day tourist is coming back. He meets the same villager, so he asks: "Did you sell your dog?" "Yes,to my neighbor, for $1 million" "Really? And he paid in cash?" "No, he gave me two cats, but they are $500.000 each" The market cap valuation works in exactly the same way.

deleted 11y ago
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robwilliams 11y ago
Doesn't that just prove that 1 dog = 2 cats and not that anyone was actually willing to pay $1 million for the dog? People are spending real money, that they could equally well as spend on other things, on stocks - they're not just trading stocks, correct? The man in your story couldn't actually sell the dog to someone for $1 million, but people who own stock can sell for cold cash. Or am I wrong?
- adventured 11y ago
  You're correct. There's no actual basis validating anything on the order of $1 million for the two cats. That's the flaw in why the parent's example doesn't work, it never actually meets reality in any way. Market valuations don't only exist in theory. Market caps for eg public companies are generally given legitimacy through trading, routine liquidity, auditing of financials, and dozens of other processes and regulations that companies must conform to. You can sell your Microsoft stock for a very well known amount of dollars, under very well known terms, essentially any time you want during market hours; you can never sell those cats for $500,000. The difference between me claiming my right shoe is worth $50 billion, and owning all of Uber's stock and having that be worth $50 billion? People with a lot of money, and a lot of reputation, deciding that Uber is worth $50 billion, after typically having put their money where their mouth is and investing. To say nothing of Uber having a real business (meaning they can raise debt, have credit ratings, sales, cash flow, operating projections, et al), having a value that the IRS or an auditing firm or investors can actually assess, and so on. One is verifiable to some large degree, the other can never be anything more than an absurdity - I can very likely sell my Uber stock for a lot of value, even if I take a big discount; I can never sell my right shoe at even a 99.99% discount to the $50 billion.
- ncallaway 11y ago
  For small trades on the public market yes, you can trade for cash at approximately the price listed on the exchange at that moment in time. If Bill Gates wanted to liquidate his Microsoft stock, though, it's unlikely that his sale price would match the exchange. Once you get into trades of a significant portion of the company, there's not enough guaranteed to be enough liquidity at price listed on the exchanges.
adventured 11y ago
> The market cap valuation works in exactly the same way. No it doesn't, not in a functioning public market. Just because the guy claims the cats are $500,000 each, doesn't actually make it so. The sole thing occurring there, is a person is claiming something (that is obviously false). No taxing authority on the planet would assess those cats at $500,000; no professional auditing firm would either. The entire bogus premise collapses instantly upon scrutiny. In almost any market, a claim is worthless unless you can eventually cash it in for a large portion of that sum, typically in a currency that possesses real value. In your example, your cats can never be cashed in for a meaningful fraction of their proclaimed value under any scenario. I can sell my Tesla stock however, there is an extremely well established and accepted value placed on it. I can still pretend, and make an outrageous claim on what my Tesla stock is worth ($1 trillion!), however it is nothing more than a bogus claim and has no actual bearing on reality.
- prewett 11y ago
  If I understand you correctly, you are saying that value/worth exists because of price and a liquid market. This is incorrect. Price is independent of value, and does not require the ability to sell. Suppose the government made a law saying that you cannot never sell KO (Coca-Cola stock). Today KO is selling for $41.62/sh. Tomorrow, is it worthless? No. It pays a 3.05% dividend, which it typically increases 10% a year. It is worth at least $1.27 (the first year's dividend). Now to the question about cats selling for $500k. Would a sensible taxing authority or professional auditing firm assess a flower at $500k - $1 million? In 1637 a single Viceroy tulip bulb sold for 3000 - 4500 florins; a skilled craftsman made 300 florins/yr [1]. Assuming that a skilled craftsman would make at least $50k/yr (probably more, given that $50k is near the median US income), one tulip bulb cost $500k - $1 million. Not so different from selling cats for $500k, so you cannot attack the example for unreasonable prices (s/(dog|cat)/tulip bulb/). Now, was it worth that price? No, hence why it fell back to a much more reasonable level shortly afterwards. But during the mania, selling one tulip in exchange for two lesser-valued tulips would be quite valid. You missed the point of the illustration, which was that price (market cap) has no relationship with value. Admittedly, the illustration was rather opaque. [1] https://en.wikipedia.org/wiki/Tulip_mania https://en.wikipedia.org/wiki/Tulip_mania

by mamon 11y ago

deleted 11y ago

[deleted]

robwilliams 11y ago

Doesn't that just prove that 1 dog = 2 cats and not that anyone was actually willing to pay $1 million for the dog? People are spending real money, that they could equally well as spend on other things, on stocks - they're not just trading stocks, correct? The man in your story couldn't actually sell the dog to someone for $1 million, but people who own stock can sell for cold cash. Or am I wrong?

adventured 11y ago
You're correct. There's no actual basis validating anything on the order of $1 million for the two cats. That's the flaw in why the parent's example doesn't work, it never actually meets reality in any way. Market valuations don't only exist in theory. Market caps for eg public companies are generally given legitimacy through trading, routine liquidity, auditing of financials, and dozens of other processes and regulations that companies must conform to. You can sell your Microsoft stock for a very well known amount of dollars, under very well known terms, essentially any time you want during market hours; you can never sell those cats for $500,000. The difference between me claiming my right shoe is worth $50 billion, and owning all of Uber's stock and having that be worth $50 billion? People with a lot of money, and a lot of reputation, deciding that Uber is worth $50 billion, after typically having put their money where their mouth is and investing. To say nothing of Uber having a real business (meaning they can raise debt, have credit ratings, sales, cash flow, operating projections, et al), having a value that the IRS or an auditing firm or investors can actually assess, and so on. One is verifiable to some large degree, the other can never be anything more than an absurdity - I can very likely sell my Uber stock for a lot of value, even if I take a big discount; I can never sell my right shoe at even a 99.99% discount to the $50 billion.
ncallaway 11y ago
For small trades on the public market yes, you can trade for cash at approximately the price listed on the exchange at that moment in time. If Bill Gates wanted to liquidate his Microsoft stock, though, it's unlikely that his sale price would match the exchange. Once you get into trades of a significant portion of the company, there's not enough guaranteed to be enough liquidity at price listed on the exchanges.

adventured 11y ago

> The market cap valuation works in exactly the same way. No it doesn't, not in a functioning public market. Just because the guy claims the cats are $500,000 each, doesn't actually make it so. The sole thing occurring there, is a person is claiming something (that is obviously false). No taxing authority on the planet would assess those cats at $500,000; no professional auditing firm would either. The entire bogus premise collapses instantly upon scrutiny. In almost any market, a claim is worthless unless you can eventually cash it in for a large portion of that sum, typically in a currency that possesses real value. In your example, your cats can never be cashed in for a meaningful fraction of their proclaimed value under any scenario. I can sell my Tesla stock however, there is an extremely well established and accepted value placed on it. I can still pretend, and make an outrageous claim on what my Tesla stock is worth ($1 trillion!), however it is nothing more than a bogus claim and has no actual bearing on reality.

prewett 11y ago
If I understand you correctly, you are saying that value/worth exists because of price and a liquid market. This is incorrect. Price is independent of value, and does not require the ability to sell. Suppose the government made a law saying that you cannot never sell KO (Coca-Cola stock). Today KO is selling for $41.62/sh. Tomorrow, is it worthless? No. It pays a 3.05% dividend, which it typically increases 10% a year. It is worth at least $1.27 (the first year's dividend). Now to the question about cats selling for $500k. Would a sensible taxing authority or professional auditing firm assess a flower at $500k - $1 million? In 1637 a single Viceroy tulip bulb sold for 3000 - 4500 florins; a skilled craftsman made 300 florins/yr [1]. Assuming that a skilled craftsman would make at least $50k/yr (probably more, given that $50k is near the median US income), one tulip bulb cost $500k - $1 million. Not so different from selling cats for $500k, so you cannot attack the example for unreasonable prices (s/(dog|cat)/tulip bulb/). Now, was it worth that price? No, hence why it fell back to a much more reasonable level shortly afterwards. But during the mania, selling one tulip in exchange for two lesser-valued tulips would be quite valid. You missed the point of the illustration, which was that price (market cap) has no relationship with value. Admittedly, the illustration was rather opaque. [1] https://en.wikipedia.org/wiki/Tulip_mania https://en.wikipedia.org/wiki/Tulip_mania