3 ms·

I don't understand, aren't future events supposed to be already considered in the stock price? It's not like a vaccine was unpredictable

Cthulhu_ 6y ago
Yeah, but investors seem to want to hold on to stocks for as long as possible (dividends? I don't know how that works, as far as I know holding stock for dividends is nowhere near as profitable as speculating)
- triangleman 6y ago
  Reuters calculated [1] that the average holding period for stocks is down to 5.5 months recently. See the chart on that page, it has been as high as 8 years in the past. Because of day traders and HFT, it's hard to say how long your average investor holds a stock, but it's fair to say that some hold it for a long time and others "speculate" most of the time. The speculators probably have a greater impact on the movement of a stock, but over time it must move in line with the performance of the company. The price of a stock is thought to be a "risk adjusted present value" of the underlying company. Even if you could be 100% sure a company would make X dollars per year in perpetuity, the price would not be infinite. Instead each year of earnings is "discounted" by risk, inflation rate, the cost of borrowing money, the value of competing investments, and other factors. If it was assumed by investors that Zoom would make lots of money for the next 5 years, and then make very little money, and this news meant they would only make lots of money for the next 3 years, then that will have an impact of 2 years worth of discounted earnings immediately. (of course it's not like Zoom pays or is planning to pay a dividends but there's still an underlying value, for instance they could be purchased by a larger company that does pay dividends.) [1] https://www.reuters.com/article/us-health-coronavirus-short-termism-anal/buy-sell-repeat-no-room-for-hold-in-whipsawing-markets-idUSKBN24Z0XZ https://www.reuters.com/article/us-health-coronavirus-short-...
mettamage 6y ago
+1 Thanks for putting it so succinctly. I really hope someone who knows a thing or two about the efficient market hypothesis can elighten us a bit.
- _fourzerofour 6y ago
  Just going to plug a book here that was an awesome read in my undergrad on that topic, and the history of quant finance over the 20th / early 21st centuries: https://byjustinfox.com/myth-of-the-rational-market/ https://byjustinfox.com/myth-of-the-rational-market/
  - mettamage 6y ago
    Thanks ... (it seems I can't find your username, how odd) I really appreciate the guidance as I'm quite new to it. Especially so because you're enthusiastic about this book :D
- andrepd 6y ago
  Well, it's bullshit x)
- TomGullen 6y ago
  If a stocks price is $100, and tomorrow there will be a news event where there is a 50% chance it will be worth $50, and a 50% chance it will be worth $200, the trading value today should probably be around $125 (it's expected value or EV, $200 + $50 / 2). When the defining event actually occurs, it will either move from $125 to $50, or $125 to $200. So the news event in this example is priced in at $125, but there is still scope for big moves when certainty is realised. Obviously in real life the values are never as certain. In the above example if the stocks ever trades < $125 before the event, you would make money in the long run. EMH shouldn't be taken seriously as the market actors are compromised of irrational humans.
- baq 6y ago
  everybody who knows about efficient market hypothesis knows that it's assumptions aren't applicable to the real world and it doesn't really matter; the real problem is those folks who mindlessly repeat propaganda about markets being rational or fair or generally doing the right thing when they clearly aren't.
rubidium 6y ago
Kind of, but two things: (1) the markets are irrational. And (2) real events (eg 100% certainty that we have a vaccine passing phase 3 right now) are different than 90% chance that we’ll have a vaccine in the next y months.
patwolf 6y ago
It doesn't always work like that. It's clear to some folks that ZM will decline based on the fact that a COVID vaccine was virtually inevitable. However, there are lots of investors, mostly retail investors, that are willing to buy a stock without fully pricing that in. E.g. Tim's dad sees that Tim is using Zoom for school and decides it would be a good investment. Other investors are willing to buy ZM for short-term gain as long as they can get out before it crashes back to reality. The same thing happened to Hertz, which even after declaring bankruptcy and almost certainly being worthless continued to trade at a healthy volume. In fact, Hertz tried to get approval to dilute and sell more shares to capitalize off the fact that people were buying their worthless stock.
OJFord 6y ago
Well, stock prices move right? If everything was always perfectly priced in, they'd be constant. This movement or reaction is exactly that pricing in of future events given a change in information.
harryh 6y ago
A vaccine was (and still is to some degree), in fact, unpredictable. When will one be developed? How effective will it be? Will it have any negative side effects? How hard will it be to manufacture and distribute? All of these are important questions that were hard to predict. Today's announcement sheds some light on possible answers to these questions, so this new information is being priced into the market.
sfblah 6y ago
If anything, I'd expect this to be bearish, because it might cause the Fed to stop printing money.

Cthulhu_ 6y ago

Yeah, but investors seem to want to hold on to stocks for as long as possible (dividends? I don't know how that works, as far as I know holding stock for dividends is nowhere near as profitable as speculating)

triangleman 6y ago
Reuters calculated [1] that the average holding period for stocks is down to 5.5 months recently. See the chart on that page, it has been as high as 8 years in the past. Because of day traders and HFT, it's hard to say how long your average investor holds a stock, but it's fair to say that some hold it for a long time and others "speculate" most of the time. The speculators probably have a greater impact on the movement of a stock, but over time it must move in line with the performance of the company. The price of a stock is thought to be a "risk adjusted present value" of the underlying company. Even if you could be 100% sure a company would make X dollars per year in perpetuity, the price would not be infinite. Instead each year of earnings is "discounted" by risk, inflation rate, the cost of borrowing money, the value of competing investments, and other factors. If it was assumed by investors that Zoom would make lots of money for the next 5 years, and then make very little money, and this news meant they would only make lots of money for the next 3 years, then that will have an impact of 2 years worth of discounted earnings immediately. (of course it's not like Zoom pays or is planning to pay a dividends but there's still an underlying value, for instance they could be purchased by a larger company that does pay dividends.) [1] https://www.reuters.com/article/us-health-coronavirus-short-termism-anal/buy-sell-repeat-no-room-for-hold-in-whipsawing-markets-idUSKBN24Z0XZ https://www.reuters.com/article/us-health-coronavirus-short-...

mettamage 6y ago

+1 Thanks for putting it so succinctly. I really hope someone who knows a thing or two about the efficient market hypothesis can elighten us a bit.

_fourzerofour 6y ago
Just going to plug a book here that was an awesome read in my undergrad on that topic, and the history of quant finance over the 20th / early 21st centuries: https://byjustinfox.com/myth-of-the-rational-market/ https://byjustinfox.com/myth-of-the-rational-market/
- mettamage 6y ago
  Thanks ... (it seems I can't find your username, how odd) I really appreciate the guidance as I'm quite new to it. Especially so because you're enthusiastic about this book :D
andrepd 6y ago
Well, it's bullshit x)
TomGullen 6y ago
If a stocks price is $100, and tomorrow there will be a news event where there is a 50% chance it will be worth $50, and a 50% chance it will be worth $200, the trading value today should probably be around $125 (it's expected value or EV, $200 + $50 / 2). When the defining event actually occurs, it will either move from $125 to $50, or $125 to $200. So the news event in this example is priced in at $125, but there is still scope for big moves when certainty is realised. Obviously in real life the values are never as certain. In the above example if the stocks ever trades < $125 before the event, you would make money in the long run. EMH shouldn't be taken seriously as the market actors are compromised of irrational humans.
baq 6y ago
everybody who knows about efficient market hypothesis knows that it's assumptions aren't applicable to the real world and it doesn't really matter; the real problem is those folks who mindlessly repeat propaganda about markets being rational or fair or generally doing the right thing when they clearly aren't.

rubidium 6y ago

Kind of, but two things: (1) the markets are irrational. And (2) real events (eg 100% certainty that we have a vaccine passing phase 3 right now) are different than 90% chance that we’ll have a vaccine in the next y months.

patwolf 6y ago

It doesn't always work like that. It's clear to some folks that ZM will decline based on the fact that a COVID vaccine was virtually inevitable. However, there are lots of investors, mostly retail investors, that are willing to buy a stock without fully pricing that in. E.g. Tim's dad sees that Tim is using Zoom for school and decides it would be a good investment. Other investors are willing to buy ZM for short-term gain as long as they can get out before it crashes back to reality. The same thing happened to Hertz, which even after declaring bankruptcy and almost certainly being worthless continued to trade at a healthy volume. In fact, Hertz tried to get approval to dilute and sell more shares to capitalize off the fact that people were buying their worthless stock.

OJFord 6y ago

Well, stock prices move right? If everything was always perfectly priced in, they'd be constant. This movement or reaction is exactly that pricing in of future events given a change in information.

harryh 6y ago

A vaccine was (and still is to some degree), in fact, unpredictable. When will one be developed? How effective will it be? Will it have any negative side effects? How hard will it be to manufacture and distribute? All of these are important questions that were hard to predict. Today's announcement sheds some light on possible answers to these questions, so this new information is being priced into the market.

sfblah 6y ago

If anything, I'd expect this to be bearish, because it might cause the Fed to stop printing money.