4 ms·

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

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...
  - danielmarkbruce 5y ago
    Do you mean it's basically impossible to precisely calculate? If so, yes. But I believe (and many smart folks who have made a lot of money doing so also believe) it's possible to accurately give a range. Like, company X is worth between $900 million and $1.1 billion.
    - baq 5y ago
      I mean that even such a range doesn’t really say anything because it doesn’t describe what is included in the valuation. Is it nav, npv or are some future cash flows also included? It’s up to the person giving the valuation to describe.
      - danielmarkbruce 5y ago
        In practically every case when talking about a publicly listed company, such a number is referring to a fully diluted market capitalization based on the net present value of the cashflows which would be received by the common stock holders. The cash could be dividends, it could be buybacks, they could be a result of regular cash coming out of the business, or a sale of assets - it doesn't matter. There really is no confusion amongst people in the industry.If they are talking about something different, they will explicitly say so (the easy example is Enterprise Value, or EV).

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...
- danielmarkbruce 5y ago
  Do you mean it's basically impossible to precisely calculate? If so, yes. But I believe (and many smart folks who have made a lot of money doing so also believe) it's possible to accurately give a range. Like, company X is worth between $900 million and $1.1 billion.
  - baq 5y ago
    I mean that even such a range doesn’t really say anything because it doesn’t describe what is included in the valuation. Is it nav, npv or are some future cash flows also included? It’s up to the person giving the valuation to describe.
    - danielmarkbruce 5y ago
      In practically every case when talking about a publicly listed company, such a number is referring to a fully diluted market capitalization based on the net present value of the cashflows which would be received by the common stock holders. The cash could be dividends, it could be buybacks, they could be a result of regular cash coming out of the business, or a sale of assets - it doesn't matter. There really is no confusion amongst people in the industry.If they are talking about something different, they will explicitly say so (the easy example is Enterprise Value, or EV).