3 ms·

What is the "accurate" price of a security, particularly if it does not pay a dividend? And what good is achieved by that price being found?

cs702 9y ago
Pricing is more accurate when it's closer to the net present value of the profits that could be taken out of the business by a person "who buys it for keeps," to paraphrase J. M. Keynes. The more accurate a market is at pricing securities, the less severe the magnitude of bubbles and subsequent crashes. Bubbles are extreme examples of overoptimistic pricing. To be clear, I do NOT know if index funds are causing pricing to be less, or more, accurate. I don't think anyone else knows either. That said, it seems to me that (1) the ongoing mass-scale removal of intelligence from the investment process is unlikely to make pricing more accurate, and (2) these days, stock prices are looking frothy by many measures (e.g., Shiller CAPE).
- bandrami 9y ago
  I'm still missing something here. A stock is an instrument of potential income and control, but I've never seen a price that was anywhere close to correlated with that. In fact, if anything there seems to be a discount given to high-dividend stocks (for which I, as an income investor, am grateful to all you baseball card traders that I don't understand). To put it another way: the actual value of a no-dividend no-vote stock is precisely zero. The price is whatever the buyer and seller agree on, right? So how can one price be more "accurate" than another?
  - kshitijl 9y ago
    In the event of liquidation, shareholders are on the list of those owed a portion of the proceeds. In fact they are last on the list, after creditors (those who have loaned the company money directly), bondholders (bonds are a form of debt), and holders of preferred stock. That right is the ultimate determinant of the value of a no-dividend no-vote stock: fractional ownership of the right to proceeds in the event of liquidation, after those above have had theirs. As a higher-risk asset, it produces greater returns, since otherwise there is an arbitrage: buy bonds issued by the same company instead. This arbitrage lasts until the bond becomes "expensive", and therefore produces worse returns (since its payout is independent of its price).

cs702 9y ago

Pricing is more accurate when it's closer to the net present value of the profits that could be taken out of the business by a person "who buys it for keeps," to paraphrase J. M. Keynes. The more accurate a market is at pricing securities, the less severe the magnitude of bubbles and subsequent crashes. Bubbles are extreme examples of overoptimistic pricing. To be clear, I do NOT know if index funds are causing pricing to be less, or more, accurate. I don't think anyone else knows either. That said, it seems to me that (1) the ongoing mass-scale removal of intelligence from the investment process is unlikely to make pricing more accurate, and (2) these days, stock prices are looking frothy by many measures (e.g., Shiller CAPE).

bandrami 9y ago
I'm still missing something here. A stock is an instrument of potential income and control, but I've never seen a price that was anywhere close to correlated with that. In fact, if anything there seems to be a discount given to high-dividend stocks (for which I, as an income investor, am grateful to all you baseball card traders that I don't understand). To put it another way: the actual value of a no-dividend no-vote stock is precisely zero. The price is whatever the buyer and seller agree on, right? So how can one price be more "accurate" than another?
- kshitijl 9y ago
  In the event of liquidation, shareholders are on the list of those owed a portion of the proceeds. In fact they are last on the list, after creditors (those who have loaned the company money directly), bondholders (bonds are a form of debt), and holders of preferred stock. That right is the ultimate determinant of the value of a no-dividend no-vote stock: fractional ownership of the right to proceeds in the event of liquidation, after those above have had theirs. As a higher-risk asset, it produces greater returns, since otherwise there is an arbitrage: buy bonds issued by the same company instead. This arbitrage lasts until the bond becomes "expensive", and therefore produces worse returns (since its payout is independent of its price).