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Does this work in liquid markets though? Demand could obviously drive up price beyond fundamental value in a bubble, or below fundamental value in a panic. But
by graeme 7y ago
Does this work in liquid markets though? Demand could obviously drive up price beyond fundamental value in a bubble, or below fundamental value in a panic.
But in the ordinary course of things, we would expect the price of a security to match its value in the long run.
If you are a rational, amoral investor, and you see a security worth $100, you would be prepared to pay up to $100 for it, and to buy it in as large a quantity as you could if it was selling for less. Assuming there is more than one such investor in the market, we would expect them to bid roughly to the expected value of the stock.
I suspect this was the reasoning underlying Mr. Gates' comments. As long as customers buy the oil then the security has value for investors.
- olau 7y ago> Does this work in liquid markets though? Well, I think the idea is to try to the make the market for these stocks less liquid. And it might work, because the long run you're talking about isn't actually looking too bright due to the technological developments with renewables and electric vehicles. These stocks are not retirement stocks, unless you're retiring in a couple of years.
- solveit 7y agoThe point is that it takes near universal coordination to actually hurt liquidity. Otherwise, you're just funneling money to amoral investors.
- graeme 7y agoFurther to this: a key point of South African divestment was people didn't buy products from South Africa, or form partnerships with their institutions. Depending on how liquid a product was, this type of action can have real consequences. Eg: * boycotting a specific type of industrial product mainly bought in Europe = big impact * Boycotting wheat = small impact, this is easily sold elsewhere * Boycotting sports term = big impact. Often only one league matters Shared are quite liquid. Likewise, a boycott of a specific oil company would do little to thwart oil use. Not buying oil itself actually has some impact, by shifting the demand curve.
- ClumsyPilot 7y agoThere is no 'Fundamental value'. The price is only determined by supply and demand. Companies are traded with wildly different valuation to profit ratios, perception of stability, speculation of future profit, and even ethics. For example look at TSLA valuation compared to revenue, and compare it to any other car company. Stock prices also go up after governments print money, because banks have spare cash to invest but the economics of an individual company have not changed. At the end of the day an investor can't calculate fundamental value, there is no agreed formula for it.
- coldtea 7y ago>There is no 'Fundamental value'. The price is only determined by supply and demand. That's a "first order" thinking. The parent posits that there are forces working (eg. use value or prestige value or fad value) before and beyond "demand" (which is obvious - else what drives demand itself? It's not some magic entity that emerges out of nowhere). And hence, demand could be driven up beyond a sustainable level (e.g. in the case of the "gold rush", or the "tulip bubble" -accurate or not-), and be corrected when that reaches its breaking point. Or a state or business could also drive up demand artificially in some cases (e.g. buying its own stock covertly). >At the end of the day an investor can't calculate fundamental value, there is no agreed formula for it. No, but if they're good, they can and should approximately calculate how different this "fundamental value" is from the traded value, and how sustained is the demand, to calculate the trajectory of a stock, and its rick...