4 ms·

This is gonna be sort of basic but i think it conveys the main point Lets say that you own x units of item y. You sell one of item y to someone for $100 dollar

This is gonna be sort of basic but i think it conveys the main point Lets say that you own x units of item y. You sell one of item y to someone for $100 dollars on an established exchange. According to the exchange, you have 100*(x-1) dollars of wealth. Next day, some person comes along and tries to sell the same item for $100, but can only find a buyer for $50. Your wealth has now been cut in half.

saidajigumi 7y ago
Then there's Warren Buffet's approach, which is to understand the "value" of the asset. He uses an example around a farm he purchased, one of his early investments. He likened the stock market to a (hypothetical) crazy neighbor to his farm, who every morning shouts a purchase price over the fence at him. One day, the price is half what it was the prior day! Buffet's lesson is that he learned to remain calm, because the underlying value of the investment didn't change. Thus the challenge is separating market feedback reactions (aka fear and bidding robots) from real-world valuation adjustments (aka mere delayed demand vs. destruction of long-term value).
- strbean 7y ago
  This is an excellent analogy. The stock market is an aggregate of people's sentiments and numerical analyses (which often have absolutely no predictive power). I think the old George Carlin quote applies perfectly to it - "Think of how stupid the average person is, and realize half of them are stupider than that." If you've ever tried to pick stocks, you'll see countless examples where the stock price just seems to ignore the realities of a company. Level Three Communications taught me that lesson. Huge backbone fiber provider, growing and scoring major contracts continually, increasing revenues/profits for a decade, and the stock prices was practically constant. Then they rebrand as a CDN (with zero impact to how they operate) and their price rides the buzzword wave right into a big acquisition.
perl4ever 7y ago
Something I did not learn from Warren Buffett, is that the value of a public company is not the stock price x the number of shares. Not in some fuzzy nebulous way or some of the time, but quite definitely in all cases. That's because any market has depth - there are only so many people willing to buy and sell right now at the market price. Most of the owners of, say, Apple (or any company) think it's worth more, maybe a lot more, than the "market" price. If someone wants to buy the whole company they pretty much always have to pay significantly more. It's the opposite for selling. Most of the people who don't own it think it's worth less than the market price, maybe much less. So the market price isn't as real or as much of a consensus as people think it is. If you average a lot of opinions, the result isn't necessarily anyone's opinion, much less a correct one.

saidajigumi 7y ago

Then there's Warren Buffet's approach, which is to understand the "value" of the asset. He uses an example around a farm he purchased, one of his early investments. He likened the stock market to a (hypothetical) crazy neighbor to his farm, who every morning shouts a purchase price over the fence at him. One day, the price is half what it was the prior day! Buffet's lesson is that he learned to remain calm, because the underlying value of the investment didn't change. Thus the challenge is separating market feedback reactions (aka fear and bidding robots) from real-world valuation adjustments (aka mere delayed demand vs. destruction of long-term value).

strbean 7y ago
This is an excellent analogy. The stock market is an aggregate of people's sentiments and numerical analyses (which often have absolutely no predictive power). I think the old George Carlin quote applies perfectly to it - "Think of how stupid the average person is, and realize half of them are stupider than that." If you've ever tried to pick stocks, you'll see countless examples where the stock price just seems to ignore the realities of a company. Level Three Communications taught me that lesson. Huge backbone fiber provider, growing and scoring major contracts continually, increasing revenues/profits for a decade, and the stock prices was practically constant. Then they rebrand as a CDN (with zero impact to how they operate) and their price rides the buzzword wave right into a big acquisition.

perl4ever 7y ago

Something I did not learn from Warren Buffett, is that the value of a public company is not the stock price x the number of shares. Not in some fuzzy nebulous way or some of the time, but quite definitely in all cases. That's because any market has depth - there are only so many people willing to buy and sell right now at the market price. Most of the owners of, say, Apple (or any company) think it's worth more, maybe a lot more, than the "market" price. If someone wants to buy the whole company they pretty much always have to pay significantly more. It's the opposite for selling. Most of the people who don't own it think it's worth less than the market price, maybe much less. So the market price isn't as real or as much of a consensus as people think it is. If you average a lot of opinions, the result isn't necessarily anyone's opinion, much less a correct one.