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> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value

> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value is. This is true for people who are buying as speculative investors and focused on short term movements in stock price. However, that's not everyone by a longshot. There are plenty of people who buy for underlying asset value and dividends. See, for instance - http://en.wikipedia.org/wiki/Intelligent_Investor http://en.wikipedia.org/wiki/Intelligent_Investor Warren Buffet has said that The Intelligent Investor is the best book on investing ever written. A fundamental tenet of value investing is that you're buying a small part of a business, not something separate from the business. Keynes is talking about buying stocks to speculative on short term price movements, which is risky and probably a bad strategy for the vast majority of people. But buying a share of a business that's fundamentally solid and priced attractively is rational, even if the business isn't currently popular.

esrauch 15y ago
It seems to me that for companies that pay no dividends (and assuming you would have not nearly enough stock to have a vote that matters) there is no value at all in the stock outside of the stock price. The only relevant metric is what other people are willing to pay to buy your stock. Through some mechanism that I can't undertand, the perception of the stock value is still tied to the performance of the company, so it seems like even people going long are still dealing with their predictions of other peoples valuations.
- Retric 15y ago
  IMO, the fundamentals are the only really important factor in a long term stock purchasing because the rest is mostly just paperwork. Companies can start to pay dividends even if they have avoided them for a vary long period of time. EX: Microsoft Companies can also be bought out and have their total stock price + a small premium paid out to their investors. And finally rather than pay a dividend a stock buy back program can accomplish the same net result with significant tax advantages.
- lotharbot 15y ago
  > for companies that pay no dividends ... there is no value at all in the stock outside of the stock price [but] the perception of the stock value is still tied to the performance of the company Owning a stock is like owning a fraction of a company. The value of stock comes from the following: (1) dividends (that is, a fraction of current profits) (2) assets (that is, a fraction of stuff the company has that could be sold; one of Warren Buffett's strategies is to buy companies that have more assets than their total stock price, such that merely liquidating the company would turn a profit.) (3) estimated future dividends (a company may not presently be paying dividends, but may be on a clear trajectory to profitability and therefore future dividends) (4) estimated future assets ("growth" type stocks are in companies that are investing profits in assets rather than paying out dividends. This has certain tax advantages over dividend-paying stocks.) (5) estimated future valuations (that is, guesses as to what others might pay for the stock later) Notice that only one of these involves perceptions of others' valuations. The rest are a matter of company performance.
  - _delirium 15y ago
    For assets (or future assets), you need to discount them by a probability that the investor could ever actually see that money, either via dividends, or via a 'liquidity event' of one sort or another, since an asset isn't really your asset if you can never touch it. Warren Buffet sees to that by buying controlling stakes in companies, so not only do the companies have assets that could theoretically be liquidated for a profit, but he could actually liquidate the company if he wanted to (or at least, could force it to start selling off assets and returning their value as dividends).
jakarta 15y ago
It might not be everyone, but I can say for certain that most market participants are NOT value investors.
- mhansen 15y ago
  Where's the evidence?
  - jakarta 15y ago
    Centuries of financial crises and speculative contagions seem to be enough evidence for me. If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. Value investors buy assets at a discount to their intrinsic value and they derive that intrinsic value using conservative assumptions on factors such as liquidation value and future cash flows. If majority of market participants were value investors you would not have had the Dutch Tulip Mania, South Sea Bubble, or more recently the Dot Com Bubble / pre-GFC highs reached in 2006/2007.
    - hugh3 15y ago
      If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically I'd like to see that quantified. If 60% of investors were value investors and 40% were speculators, would we still get bubbles? I'm thinking yes. In reality, most people are in the middle. Looking for value, but still mortal, fallible and susceptible to being persuaded that the flavour of the month really is the next big thing.
    - RickHull 15y ago
      > If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. There is an argument that bubbles are the result of overexpansion of credit. Granting systematic credit is the basic function of central banks.
      - 15y ago
dangravell 15y ago
I don't think the insights offered by TII necessarily disagree with the OP. In fact, I'd say the whole concept of Mr Market chimes in quite well. Both imply a policy of wariness when approaching company values.
Symmetry 15y ago
I think buying for the long term is a very good thing, but I tend to assume that there aren't many undervalued stocks laying around. Bubbles happen even if there are smart people around who know not to take part, but if there are smart people around its hard for a stock to get too undervalued and I don't care to assume I can do a better job of computing a stocks overall value than professionals do. Sometimes people like Warren Buffet can find gems in the rough, but a large part of that is that they have the resources to swoop in and buy enough stock to sack managers who aren't doing a good job. I can't do that. I tend to ask myself instead "What do I know that the market doesn't?" I have an engineering education and experience and I can make judgments about a companies products and the long term future of their products that Wall Street investors might not be able to. This is all no guarantee and I keep most of my money in index funds, but its worked out well for me so far.

esrauch 15y ago

It seems to me that for companies that pay no dividends (and assuming you would have not nearly enough stock to have a vote that matters) there is no value at all in the stock outside of the stock price. The only relevant metric is what other people are willing to pay to buy your stock. Through some mechanism that I can't undertand, the perception of the stock value is still tied to the performance of the company, so it seems like even people going long are still dealing with their predictions of other peoples valuations.

Retric 15y ago
IMO, the fundamentals are the only really important factor in a long term stock purchasing because the rest is mostly just paperwork. Companies can start to pay dividends even if they have avoided them for a vary long period of time. EX: Microsoft Companies can also be bought out and have their total stock price + a small premium paid out to their investors. And finally rather than pay a dividend a stock buy back program can accomplish the same net result with significant tax advantages.
lotharbot 15y ago
> for companies that pay no dividends ... there is no value at all in the stock outside of the stock price [but] the perception of the stock value is still tied to the performance of the company Owning a stock is like owning a fraction of a company. The value of stock comes from the following: (1) dividends (that is, a fraction of current profits) (2) assets (that is, a fraction of stuff the company has that could be sold; one of Warren Buffett's strategies is to buy companies that have more assets than their total stock price, such that merely liquidating the company would turn a profit.) (3) estimated future dividends (a company may not presently be paying dividends, but may be on a clear trajectory to profitability and therefore future dividends) (4) estimated future assets ("growth" type stocks are in companies that are investing profits in assets rather than paying out dividends. This has certain tax advantages over dividend-paying stocks.) (5) estimated future valuations (that is, guesses as to what others might pay for the stock later) Notice that only one of these involves perceptions of others' valuations. The rest are a matter of company performance.
- _delirium 15y ago
  For assets (or future assets), you need to discount them by a probability that the investor could ever actually see that money, either via dividends, or via a 'liquidity event' of one sort or another, since an asset isn't really your asset if you can never touch it. Warren Buffet sees to that by buying controlling stakes in companies, so not only do the companies have assets that could theoretically be liquidated for a profit, but he could actually liquidate the company if he wanted to (or at least, could force it to start selling off assets and returning their value as dividends).

jakarta 15y ago

It might not be everyone, but I can say for certain that most market participants are NOT value investors.

mhansen 15y ago
Where's the evidence?
- jakarta 15y ago
  Centuries of financial crises and speculative contagions seem to be enough evidence for me. If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. Value investors buy assets at a discount to their intrinsic value and they derive that intrinsic value using conservative assumptions on factors such as liquidation value and future cash flows. If majority of market participants were value investors you would not have had the Dutch Tulip Mania, South Sea Bubble, or more recently the Dot Com Bubble / pre-GFC highs reached in 2006/2007.
  - hugh3 15y ago
    If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically I'd like to see that quantified. If 60% of investors were value investors and 40% were speculators, would we still get bubbles? I'm thinking yes. In reality, most people are in the middle. Looking for value, but still mortal, fallible and susceptible to being persuaded that the flavour of the month really is the next big thing.
  - RickHull 15y ago
    > If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. There is an argument that bubbles are the result of overexpansion of credit. Granting systematic credit is the basic function of central banks.
    - 15y ago

dangravell 15y ago

I don't think the insights offered by TII necessarily disagree with the OP. In fact, I'd say the whole concept of Mr Market chimes in quite well. Both imply a policy of wariness when approaching company values.

Symmetry 15y ago

I think buying for the long term is a very good thing, but I tend to assume that there aren't many undervalued stocks laying around. Bubbles happen even if there are smart people around who know not to take part, but if there are smart people around its hard for a stock to get too undervalued and I don't care to assume I can do a better job of computing a stocks overall value than professionals do. Sometimes people like Warren Buffet can find gems in the rough, but a large part of that is that they have the resources to swoop in and buy enough stock to sack managers who aren't doing a good job. I can't do that. I tend to ask myself instead "What do I know that the market doesn't?" I have an engineering education and experience and I can make judgments about a companies products and the long term future of their products that Wall Street investors might not be able to. This is all no guarantee and I keep most of my money in index funds, but its worked out well for me so far.