4 ms·

I'm going to tackle this question with all the naivete of someone who has no real idea what they're talking about but has an intuitive feeling for how things mi

I'm going to tackle this question with all the naivete of someone who has no real idea what they're talking about but has an intuitive feeling for how things might be. Some possible scenarios: 1. The company exists to be profitable for its owners. In this case, a share has value based on how much profit is divided among these shares. 2. The company exists to be sold. In this case, a share has value as a piece of that sale value. 3. The company exists to make a difference in society. In this case, a share can have value as a "vote" in how the company is run. How meaningful this "vote" is depends on how the shares have been distributed. I think where private shares can sometimes run into trouble is that there's no clear answer to what value having a piece of the company brings. At a privately-held company I worked at, we got options but nobody was buying (and we weren't really looking to sell). There was no profit sharing. And the vast majority of shares were owned by an investment group so having a "vote" didn't matter. In that case, it turned out that that group sold to another and at that point we had to exercise our options in order to sell those shares to the buyer, so those options did end up having value. But for many years they were effectively worthless regardless of what dollar value the company put on them because nobody was actually buying.

perlgeek 6y ago
The public market also has some trouble with valuations. Consider a company that has several big shareholders that are in it for the long run (several years to tens of years); they are just holding onto their shares as long as nothing catastrophic happens. Those shareholders don't trade these stocks much, if it all, so they don't actively participate in determining the trading price; that is mostly done by the more volatile market participants. Somebody runs a short against the company, the stock drops 8%, all of middle and upper management is freaked out -- even though less than 5% of all company stocks have been traded, and the long-term shareholders are actually cool with how things are run. As for example and employee holding some stock, you'd typically want to know: * how do the long term investors value the company right now? (this doesn't change all too often, no need to look at your stock ticker twice a day) * how much would I get if I sold some stocks right now (to liquidate)? The first information is very hard to come by right now.
- fakedang 6y ago
  Your short anecdote is usually the story of shorts that turn out to be successful. Usually it's a solid company outwardly, maybe a few years less than the grandees like Microsoft and IBM, but on strong footing, but as you look deep inside, you'll find a lot of dirt hidden in muddy waters (pun intended). On the other hand, there are firms like Tesla or Facebook, which have been shorted by a lot of investors, including traditional HF bulwarks like David Einhorn or Jim Chanos, but the firms don't move down because the shorts are often grounded in misguided perception, bias and despise rather than actual facts and data. Shorts are actually a very reasonable way to put tabs on companies and essentially threaten them to do things right. Where they have failed is when big companies like Facebook can essentially buy their way out of justice from nasty situations (as happened with the Cambridge analytica scandal), thus rendering the short ineffective against companies with large warchests. Say Tesla actively defrauded investors early on by claiming too lofty things about tech (like an unreasonably effective battery or something). In its early stages, a short against such a situation would have been devastating. As it turned out, they never defrauded and hence they are a sizeable enterprise now and have reached critical mass (and can actively claim stuff about their self-driving cars that need not be true).
  - itsoktocry 6y ago
    >As it turned out, they never defrauded As it turns out, they did defraud shareholders at least one time: https://www.cnbc.com/2018/09/27/tesla-falls-4percent-on-report-elon-musk-sued-by-sec.html https://www.cnbc.com/2018/09/27/tesla-falls-4percent-on-repo... They are currently being sued in Delaware court for another: https://www.pv-magazine.com/2020/06/12/catching-up-on-the-elon-musk-tesla-solarcity-acquisition-case/ https://www.pv-magazine.com/2020/06/12/catching-up-on-the-el...
    - fakedang 6y ago
      Yes, that's what I meant. They didn't defraud investors early on, and definitely not by overstating their technical specs and capabilities (hmmm.... NKLA), and now when they have reached critical mass (which happened around the time Tesla began trading at $200ish), they have essentially enough power to buy their way through the courts in lawsuits which will barely scratch them. Hence now they often engage in fraudulent activities, just as Facebook did with CA. I used the words "As it turns out, they never defrauded" because at the time Tesla got into the market and began its uptick, investors like Einhorn often criticized them on their technological standing, which turned out to be solid and not based on lies, unlike what those short sellers were saying.

perlgeek 6y ago

The public market also has some trouble with valuations. Consider a company that has several big shareholders that are in it for the long run (several years to tens of years); they are just holding onto their shares as long as nothing catastrophic happens. Those shareholders don't trade these stocks much, if it all, so they don't actively participate in determining the trading price; that is mostly done by the more volatile market participants. Somebody runs a short against the company, the stock drops 8%, all of middle and upper management is freaked out -- even though less than 5% of all company stocks have been traded, and the long-term shareholders are actually cool with how things are run. As for example and employee holding some stock, you'd typically want to know: * how do the long term investors value the company right now? (this doesn't change all too often, no need to look at your stock ticker twice a day) * how much would I get if I sold some stocks right now (to liquidate)? The first information is very hard to come by right now.

fakedang 6y ago
Your short anecdote is usually the story of shorts that turn out to be successful. Usually it's a solid company outwardly, maybe a few years less than the grandees like Microsoft and IBM, but on strong footing, but as you look deep inside, you'll find a lot of dirt hidden in muddy waters (pun intended). On the other hand, there are firms like Tesla or Facebook, which have been shorted by a lot of investors, including traditional HF bulwarks like David Einhorn or Jim Chanos, but the firms don't move down because the shorts are often grounded in misguided perception, bias and despise rather than actual facts and data. Shorts are actually a very reasonable way to put tabs on companies and essentially threaten them to do things right. Where they have failed is when big companies like Facebook can essentially buy their way out of justice from nasty situations (as happened with the Cambridge analytica scandal), thus rendering the short ineffective against companies with large warchests. Say Tesla actively defrauded investors early on by claiming too lofty things about tech (like an unreasonably effective battery or something). In its early stages, a short against such a situation would have been devastating. As it turned out, they never defrauded and hence they are a sizeable enterprise now and have reached critical mass (and can actively claim stuff about their self-driving cars that need not be true).
- itsoktocry 6y ago
  >As it turned out, they never defrauded As it turns out, they did defraud shareholders at least one time: https://www.cnbc.com/2018/09/27/tesla-falls-4percent-on-report-elon-musk-sued-by-sec.html https://www.cnbc.com/2018/09/27/tesla-falls-4percent-on-repo... They are currently being sued in Delaware court for another: https://www.pv-magazine.com/2020/06/12/catching-up-on-the-elon-musk-tesla-solarcity-acquisition-case/ https://www.pv-magazine.com/2020/06/12/catching-up-on-the-el...
  - fakedang 6y ago
    Yes, that's what I meant. They didn't defraud investors early on, and definitely not by overstating their technical specs and capabilities (hmmm.... NKLA), and now when they have reached critical mass (which happened around the time Tesla began trading at $200ish), they have essentially enough power to buy their way through the courts in lawsuits which will barely scratch them. Hence now they often engage in fraudulent activities, just as Facebook did with CA. I used the words "As it turns out, they never defrauded" because at the time Tesla got into the market and began its uptick, investors like Einhorn often criticized them on their technological standing, which turned out to be solid and not based on lies, unlike what those short sellers were saying.