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Companies issue shares. These shares are listed as a liability on the company's balance sheet. Each share represents a liability to the company because it entit
by wmrowan 9y ago
Companies issue shares. These shares are listed as a liability on the company's balance sheet. Each share represents a liability to the company because it entitle its holder to a share of any dividends paid by the company.
The intrinsic value of a share is the net present value of this future stream of dividend payments, not its current market price. OP's point is that the market price of a share can be significantly above its intrinsic value in periods of irrational exuberance, such as now, creating "paper wealth" that doesn't really exist and which will evaporate when the speculators head for the exit.
- perl4ever 9y agoThe present value of future dividends is highly dependent on the terminal state of the company, and the future of the economy. So I don't find wild fluctuations in stock prices to be proof that the market is inefficient or over/undervalued because the far future is very uncertain. Every stock chart is an invitation to assume false precision, because unlike a scientific measurement there is no explicit +/- range. But the true value must have a range of uncertainty, and it can easily be many orders of magnitude. Also, every time I see the phrase "irrational exuberance" I am reminded that while there was a bubble in the late 90s, at the time Greenspan famously was worrying about the market in public, the Dow was around 5,000 or so IIRC, a long time before the peak.
- maneesh 9y agoWait till you see how much more money is in the world's money supply since 2001, thanks to derivatives [1]. [1] https://pavlok.com/moneysupply https://pavlok.com/moneysupply