7 ms·

The stockmarket is like a round robin thingy, putting it lightly. All those who hold shares in FB, combined, are holding paper that is worth 900B. However, if

The stockmarket is like a round robin thingy, putting it lightly. All those who hold shares in FB, combined, are holding paper that is worth 900B. However, if even 10% of those wanted to sell their holdings at a time, the price would fall and the total holdings would be worth less for all. Now, why are they holding the shares then? Two things come into play. Firstly, say 5 years down the line, the holders have confidence that FB will still be making money, be profitable and be on the market. Secondly, that five years down the line, there is someone else who is willing to pay for the shares at a premium of what they have originally purchased for. Now what about those who are buying 5 years down the line? They too must have confidence on FB that a further 5 years or more down the line, FB will be profitable and will be in the market and keep earning money. And so on and so forth. So is FB really worth 900B, yes, if the holders keep holding it and FB keeps earning profits. Can everyone get their worth from the shares? Not at once. Not in a hurry.

deleted 5y ago
[deleted]
bredren 5y ago
For highly valued tech stocks I’d add that there is some presumption that these companies will acquire or build their way into major new sources of revenue that throw off vast profits. With tech this might be implicit if they are “profitable and still in the market.” But it is different than say John Deer or Miller Paint in that regard.
blihp 5y ago
In other words, the greater fool theory.
- berkes 5y ago
  Not really. The crucial piece is the future profit.
  - blihp 5y ago
    Right, but notice that wasn't the emphasis of the post I was responding to. OK, there was 1/2 a sentence that touched on profits as almost an afterthought. The thing that sets me off about these threads is the (I believe sincere) thinking that 'well if that's the share price, it must be worth that much'. That's fine if you're speculating/trading but is absolutely wrong if you think what you're doing is investing.
    - nl 5y ago
      > OK, there was 1/2 a sentence that touched on profits as almost an afterthought. Are we reading different posts? The post you responded to repeatedly made the point that profits are one of the key builders of market confidence: >> Firstly, say 5 years down the line, the holders have confidence that FB will still be making money, be profitable and be on the market. ... >> They too must have confidence on FB that a further 5 years or more down the line, FB will be profitable and will be in the market and keep earning money. ... >> So is FB really worth 900B, yes, if the holders keep holding it and FB keeps earning profits. It's a key point of their argument!
- nl 5y ago
  No, the opposite. The value of a company in a fair market is a function of the confidence of investors that someone in the future will pay more for the same stock. For a highly profitable company like Facebook, this isn't a foolish confidence in anyway. Even if you don't like Facebook it would be a very radical position to take to think that their profits next quarter will be remarkably lower than this quarter. In greater fool theory, you know there is no reason the investment is going to increase in value. You are just hoping someone else is going to buy from you and accept that risk too.
  - blihp 5y ago
    Thinking like that is what drove AOL and Yahoo! to their peak valuations. It's not that the companies didn't produce something of value and have some level of earnings, it's that their stocks priced in a fantasy land future that could never be achieved. At some point, there will not be someone willing to pay more, or even the same amount, for the stock. When you are counting on the 'confidence' of future investors to (over)pay more than you did for something, rather than any rational valuation, you are quite literally counting on a greater fool[1] being willing to buy it from you. [1] https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory - note that it isn't always about an asset having no value, just that for an overpriced asset that there will be someone else willing to pay more for it.
    - nl 5y ago
      Sure, one could argue that AOL and Yahoo were overvalued at their peak. They had low existing earnings and the price was supported by expectations of magical new profits. But that's a difficult argument to make for Facebook. Facebook is highly profitable - they have averaged something like 80% gross profit margins for a decade[1] while sustaining significant revenue growth. That's pretty much guaranteed that their stock will continue to appreciate - with margins that high they have a lot of room to play with things to keep growth going. What metric makes it look like that is a greater fool situation? [1] https://www.reuters.com/companies/FB.O/key-metrics https://www.reuters.com/companies/FB.O/key-metrics
jldugger 5y ago
> The stockmarket is like a round robin thingy Or perhaps a medieval wheel of fortune. [1]: https://www.sciencephoto.com/media/539503/view/the-wheel-of-fortune-15th-century-artwork https://www.sciencephoto.com/media/539503/view/the-wheel-of-...
- ehsankia 5y ago
  I was thinking like a game of musical chair. If you sit down too early to lose, but when the time comes, you better sell quick or you'll be left standing with nothing to show for it.
tootie 5y ago
Like that kid with a billion dollars of crypto. If he ever tried to spend it, he'd crash the value.

deleted 5y ago

[deleted]

bredren 5y ago

For highly valued tech stocks I’d add that there is some presumption that these companies will acquire or build their way into major new sources of revenue that throw off vast profits. With tech this might be implicit if they are “profitable and still in the market.” But it is different than say John Deer or Miller Paint in that regard.

blihp 5y ago

In other words, the greater fool theory.

berkes 5y ago
Not really. The crucial piece is the future profit.
- blihp 5y ago
  Right, but notice that wasn't the emphasis of the post I was responding to. OK, there was 1/2 a sentence that touched on profits as almost an afterthought. The thing that sets me off about these threads is the (I believe sincere) thinking that 'well if that's the share price, it must be worth that much'. That's fine if you're speculating/trading but is absolutely wrong if you think what you're doing is investing.
  - nl 5y ago
    > OK, there was 1/2 a sentence that touched on profits as almost an afterthought. Are we reading different posts? The post you responded to repeatedly made the point that profits are one of the key builders of market confidence: >> Firstly, say 5 years down the line, the holders have confidence that FB will still be making money, be profitable and be on the market. ... >> They too must have confidence on FB that a further 5 years or more down the line, FB will be profitable and will be in the market and keep earning money. ... >> So is FB really worth 900B, yes, if the holders keep holding it and FB keeps earning profits. It's a key point of their argument!
nl 5y ago
No, the opposite. The value of a company in a fair market is a function of the confidence of investors that someone in the future will pay more for the same stock. For a highly profitable company like Facebook, this isn't a foolish confidence in anyway. Even if you don't like Facebook it would be a very radical position to take to think that their profits next quarter will be remarkably lower than this quarter. In greater fool theory, you know there is no reason the investment is going to increase in value. You are just hoping someone else is going to buy from you and accept that risk too.
- blihp 5y ago
  Thinking like that is what drove AOL and Yahoo! to their peak valuations. It's not that the companies didn't produce something of value and have some level of earnings, it's that their stocks priced in a fantasy land future that could never be achieved. At some point, there will not be someone willing to pay more, or even the same amount, for the stock. When you are counting on the 'confidence' of future investors to (over)pay more than you did for something, rather than any rational valuation, you are quite literally counting on a greater fool[1] being willing to buy it from you. [1] https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory - note that it isn't always about an asset having no value, just that for an overpriced asset that there will be someone else willing to pay more for it.
  - nl 5y ago
    Sure, one could argue that AOL and Yahoo were overvalued at their peak. They had low existing earnings and the price was supported by expectations of magical new profits. But that's a difficult argument to make for Facebook. Facebook is highly profitable - they have averaged something like 80% gross profit margins for a decade[1] while sustaining significant revenue growth. That's pretty much guaranteed that their stock will continue to appreciate - with margins that high they have a lot of room to play with things to keep growth going. What metric makes it look like that is a greater fool situation? [1] https://www.reuters.com/companies/FB.O/key-metrics https://www.reuters.com/companies/FB.O/key-metrics

jldugger 5y ago

> The stockmarket is like a round robin thingy Or perhaps a medieval wheel of fortune. [1]: https://www.sciencephoto.com/media/539503/view/the-wheel-of-fortune-15th-century-artwork https://www.sciencephoto.com/media/539503/view/the-wheel-of-...

ehsankia 5y ago
I was thinking like a game of musical chair. If you sit down too early to lose, but when the time comes, you better sell quick or you'll be left standing with nothing to show for it.

tootie 5y ago

Like that kid with a billion dollars of crypto. If he ever tried to spend it, he'd crash the value.