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Benjamin Graham's "Mr. Market" allegory [1] is a decent illustration of how seriously we should take fluctuations in market prices. To take another angle on it

Benjamin Graham's "Mr. Market" allegory [1] is a decent illustration of how seriously we should take fluctuations in market prices. To take another angle on it: Market cap is simply the number of shares outstanding, multiplied by the last price anyone paid for a share. This means that market cap is determined by the tiny minority of people who are actively trading shares in a company. That group may or may not be deciding what the company is worth according to the same criteria that you or I or the vast majority of people who are simply quietly holding on to their shares might want to use. [1]: https://en.wikipedia.org/wiki/Mr._Market https://en.wikipedia.org/wiki/Mr._Market, http://www.berkshirehathaway.com/letters/1987.html http://www.berkshirehathaway.com/letters/1987.html

addicted 8y ago
Another way of phrasing that is the market cap is determined by the people who have the information, and resulting conviction, to put their own money on the idea that the company may be worth that much. Further, the reason why the market cap works is because every transaction has a buyer and a seller. The seller believes the price they are getting is above what it should be, while the buyer believes it’s below what it should be. As a result, the actual price is a consensus between people who have very different outlooks on the company, and as such almost necessarily incorporates a lot of different, and likely non overlapping, information.
- perl4ever 8y ago
  "As a result, the actual price is a consensus between people who have very different outlooks on the company" A better word would be "compromise", since there is no consensus by definition. But another point is that I always think of the price of a stock as deceptively precise. If you measure anything in a scientific sense, there is an associated +/- uncertainty. The value of a company always has an uncertainty and it might be quite large as a percentage of the total size. So when you look at the price going up and down, maybe it's only fluctuating within the zone of uncertainty.

addicted 8y ago

Another way of phrasing that is the market cap is determined by the people who have the information, and resulting conviction, to put their own money on the idea that the company may be worth that much. Further, the reason why the market cap works is because every transaction has a buyer and a seller. The seller believes the price they are getting is above what it should be, while the buyer believes it’s below what it should be. As a result, the actual price is a consensus between people who have very different outlooks on the company, and as such almost necessarily incorporates a lot of different, and likely non overlapping, information.

perl4ever 8y ago
"As a result, the actual price is a consensus between people who have very different outlooks on the company" A better word would be "compromise", since there is no consensus by definition. But another point is that I always think of the price of a stock as deceptively precise. If you measure anything in a scientific sense, there is an associated +/- uncertainty. The value of a company always has an uncertainty and it might be quite large as a percentage of the total size. So when you look at the price going up and down, maybe it's only fluctuating within the zone of uncertainty.