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The market value of stocks and corporate bonds is pretty much always larger than the book value of the underlying companies. If this is not the case you've foun

The market value of stocks and corporate bonds is pretty much always larger than the book value of the underlying companies. If this is not the case you've found yourself in a 1931-type of a bargain. The delta between the book value and the securities pricing is the estimated future profits. Now how exactly did you arrive at the conclusion that the future profits estimation is too high?

bordercases 5y ago
How did you arrive at the conclusion that your estimates were correct in the first place? That argument cuts both ways.
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dangerlibrary 5y ago
I didn't come to that conclusion, and you are ignoring the part of my comment pointing out that the critical switch is that the _returns_ on securities now exceed _returns_ on actual businesses. But, since we're now talking about overvalued securities: https://www.npr.org/2021/05/05/993754418/planet-money-the-100-million-deli https://www.npr.org/2021/05/05/993754418/planet-money-the-10...
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- danielmarkbruce 5y ago
  You might be confusing Book Value of a business with it's value as an asset, and how returns are measured. "return on actual businesses" is impossible to measure with any precision.The time horizon chosen for returns on securities is usually short. So, the returns on securities will almost always seem too high or too low compared to what is happening in the underlying business. The market returns are calculated over a fixed and usually short time period and are easy to calculate. Because the markets in question are expectations markets the prices move around a lot and hence the measured returns move around a lot. Compare that with defining "returns on actual businesses" in a way which is both sensible (ie accurate) and has even a reasonable level of precision - it's impossible. For example, a commonly used and easy way to measure it is Return on Equity. Net Income / Book Value. Book Value is an accounting number based on the past. The "true" value put on an asset by investors is based on guesses about the future of the business and said business's ability to put cash in the pockets of the owners. Net Income misses important value changes - consider Intel, who have been making crazy decisions for years which allowed AMD back in the x86 server game. Intel don't have to report a "we did stupid things which will cost us billions in 10 years time" on their income statement for a given year. So, RoE isn't good and other similar numbers are similarly bad. So, your statement about returns on securities should really say: "for the last few years, returns on securities appear to have exceeded the changes in value for the underlying businesses". To which a reasonable response is: "Yup, it happens sometimes".
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  - dangerlibrary 5y ago
    You appear to be under the impression that there is a strong causal/correlative relationship between the value of a security and some measure / function of the value or potential value of the underlying business. I would argue that there is an increasing amount of evidence that statement has gone from "plausibly true" to "pretty obviously not the case, for many securities." The underlying problem, regardless of the terminology or metrics being used to estimate value, seems to be that those with $10b in cash seem increasingly inclined to use it to speculate using various financial instruments, rather than e.g. building a manufacturing plant or a new housing development or apartment building. The growing size of the financial sector relative to the rest of the economy is the evidence I would put forward that "the returns on securities are exceeding the returns on actual business."
    - danielmarkbruce 5y ago
      I am under that impression - because most of the time most of the securities are priced in a reasonable range. There have always been a small number of weird situations where securities appear to have little relationship to the underlying. Right now there are a few - AMC and Gamestop for example. Sometimes, for short periods of time, there are many securities which are out of whack - 1999 for example. Go back 100 years and you'll see a number of periods where many securities prices were out of whack. Without hard evidence, but a decent amount of anecdata, common sense and experience I'd suggest the following: 90% of the time 90% of the securities are priced within 10% of "true value".
      - baq 5y ago
        IMHO assuming that 'true value' even exists is very bold. you'd have to integrate all possible timelines into your valuation, modeled with very fine precision, and then you're lucky if your model converges to anything other than 0 or infinity...

bordercases 5y ago

How did you arrive at the conclusion that your estimates were correct in the first place? That argument cuts both ways.

deleted 5y ago
[deleted]

dangerlibrary 5y ago

I didn't come to that conclusion, and you are ignoring the part of my comment pointing out that the critical switch is that the _returns_ on securities now exceed _returns_ on actual businesses. But, since we're now talking about overvalued securities: https://www.npr.org/2021/05/05/993754418/planet-money-the-100-million-deli https://www.npr.org/2021/05/05/993754418/planet-money-the-10...

deleted 5y ago
[deleted]
danielmarkbruce 5y ago
You might be confusing Book Value of a business with it's value as an asset, and how returns are measured. "return on actual businesses" is impossible to measure with any precision.The time horizon chosen for returns on securities is usually short. So, the returns on securities will almost always seem too high or too low compared to what is happening in the underlying business. The market returns are calculated over a fixed and usually short time period and are easy to calculate. Because the markets in question are expectations markets the prices move around a lot and hence the measured returns move around a lot. Compare that with defining "returns on actual businesses" in a way which is both sensible (ie accurate) and has even a reasonable level of precision - it's impossible. For example, a commonly used and easy way to measure it is Return on Equity. Net Income / Book Value. Book Value is an accounting number based on the past. The "true" value put on an asset by investors is based on guesses about the future of the business and said business's ability to put cash in the pockets of the owners. Net Income misses important value changes - consider Intel, who have been making crazy decisions for years which allowed AMD back in the x86 server game. Intel don't have to report a "we did stupid things which will cost us billions in 10 years time" on their income statement for a given year. So, RoE isn't good and other similar numbers are similarly bad. So, your statement about returns on securities should really say: "for the last few years, returns on securities appear to have exceeded the changes in value for the underlying businesses". To which a reasonable response is: "Yup, it happens sometimes".
- deleted 5y ago
  [deleted]
- dangerlibrary 5y ago
  You appear to be under the impression that there is a strong causal/correlative relationship between the value of a security and some measure / function of the value or potential value of the underlying business. I would argue that there is an increasing amount of evidence that statement has gone from "plausibly true" to "pretty obviously not the case, for many securities." The underlying problem, regardless of the terminology or metrics being used to estimate value, seems to be that those with $10b in cash seem increasingly inclined to use it to speculate using various financial instruments, rather than e.g. building a manufacturing plant or a new housing development or apartment building. The growing size of the financial sector relative to the rest of the economy is the evidence I would put forward that "the returns on securities are exceeding the returns on actual business."
  - danielmarkbruce 5y ago
    I am under that impression - because most of the time most of the securities are priced in a reasonable range. There have always been a small number of weird situations where securities appear to have little relationship to the underlying. Right now there are a few - AMC and Gamestop for example. Sometimes, for short periods of time, there are many securities which are out of whack - 1999 for example. Go back 100 years and you'll see a number of periods where many securities prices were out of whack. Without hard evidence, but a decent amount of anecdata, common sense and experience I'd suggest the following: 90% of the time 90% of the securities are priced within 10% of "true value".
    - baq 5y ago
      IMHO assuming that 'true value' even exists is very bold. you'd have to integrate all possible timelines into your valuation, modeled with very fine precision, and then you're lucky if your model converges to anything other than 0 or infinity...