5 ms·

Talking Stocks

48 points by prakash 18y ago

ojbyrne 18y ago
I personally couldn't entrust my wealth to someone named "Raleigh Rails." But then I don't actually have any wealth.
smanek 18y ago
I had read A Random Walk Down Wall Street in college. I truly thought that the markets were efficient, that any available knowledge about a company was already reflected in its stock price. Yet I saw Raleigh using the information I gave him to make money for his clients. Heh, that's exactly what I'm experiencing now. I've always bought the efficient markets hypothesis (i.e., that current prices already factor in all available information). But, I've been meeting analysts who are supposedly experts in their respective fields, and I've come to a simple conclusion: they can't interpret the information they're given. They are the kind of people who consider valuation by a constant multiple of eyeballs to be legitimate. They are the pointy-haired-bosses of the world, who read a few trade rags and think they are experts. In one light, it's all rather depressing. In another, it seems like a great opportunity ;-)
- ntoshev 18y ago
  In order to exploit the "inefficient market hypothesis", you need to know what information is reflected in stock price and what is not. This means you need to know the market, not just the stock.
  - byrneseyeview 18y ago
    I'm not sure that's true. e.g. if you have a company that has real estate worth $10/share, and a business that's worth $10/share, and the stock trades at $15, you don't really need to know whether the market underestimates the real estate, underestimates the business, or some combination of the two. I guess for certain kinds of dirty hedges (e.g. trading the crack spread and trading oil refinery stocks) you might need to know that.
    - ntoshev 18y ago
      You don't have complete information, so the market may know something about the stock that you don't. Even if you're right, the market can stay irrational longer than you can stay solvent. So you do need to know the market.
      - byrneseyeview 18y ago
        That's true. And I may know something about the stock that the market doesn't. It's pretty impractical to make your decisions by finding out that everyone else is wrong, rather than by ensuring that you're right (or as right as you can be). It doesn't scale, either -- AT&T used to have over a million shareholders, and interviewing every one of them about whether Ma Bell was going to raise their dividend next quarter sounds like a real chore. Even if you're right, the market can stay irrational longer than you can stay solvent. If you're leveraged, yes. If you aren't leveraged, you're going to be solvent forever. And anyway, arguing about the timing obscures the real decision -- I wouldn't discourage someone from pursuing a career because I didn't know whether or not every employer would recognize their talent after the first interview.
    - steveplace 18y ago
      The market is the inefficiency, not the stock. In order to exploit these iniffeciencies, you need to decouple the fundamentals of the underlying company with the fundamentals of the market. The price at which a financial instrument trades is simply the sum of the market supply and demand. That's the big secret. If supply runs out and demand is still there, the price will go up until someone is willing to supply more stock.
      - byrneseyeview 18y ago
        That's true, but it sounds like you're talking more about speculation (guessing prices irrespective of values) rather than investing (purchasing when the price does not reflect full value).
- pragmatic 18y ago
  A Random Walk and Efficient Market Theory are misunderstood and misrepresented. People equate efficient market with perfect market, meaning the market "knows" the right price. All that efficient market theory states is that information is communicated efficiently, not that the information is correct. Other bubbles would never happen. Proponents state that prices are only correct in the long run. Malkiel (author of A Random Walk) advocates whole market index funds simply because you cannot know what information is correct and beating the market is a fool's errand. Again the case in point being the irrational run up in tech stocks not based on fundamentals but based on the greater fool theory. Information as pricing was communicated effectively but the information is not guaranteed to be either correct or rational. The stock market is a weighing machine not a voting machine - Benjamin Graham. However, I do enjoy Cuban's take on this as he's been there and down that. I think he could write a great book at some point.
fallentimes 18y ago
I agree with most of what he writes, other than his dividends vs share buybacks commentary. I'm glad he published the descending comments though. A few quick thoughts: 1. Dividends are taxed, share buybacks are not. This is why in cases where a mature Company is sitting on a large pile of cash with little to no long term debt, share buybacks provide more value by avoiding the tax man. 2. If the management team truly believes the company is undervalued, buying shares back makes a lot of sense, especially for mature companies. However, if the buy back leads to incentive bonuses for the management team I'm 100% against it. Also, it's a lot more telling when a Company does this during a recession than a boom. 3. As alluded to in the comments, corporate earnings are relatively worthless without a cash flow statement for the same time period.
- bokonist 18y ago
  A stock buyback only increases the fundamental value of the company if it results in an increase in dividends per share. A company that buys back stock instead of paying dividends, and also has no intention of ever paying dividends, would only be valuable in the way a baseball card is valuable.
  - fallentimes 18y ago
    Right, which is why I said "mature company" (who is hopefully, by then, issueing dividends :-D). At the same time, if a company issues dividends it can't afford to pay (cough Citi cough) this can be devastating to a Company's prospects. At it's core, the whole reason stocks are worth anything to begin with is the anticipation of future dividends (DCF).
viae 18y ago
I've been reading about stock trading over the last couple months, as time allows, thanks to Metlife managing my 403b to a phenomenal 1% growth over 5 years. Hands down the best book I've read so far is, Fire Your Stock Analyst: Analyzing Stocks On Your Own (Definitive Guides (Financial Times/Prentice Hall).* All other books I've seen are "get rich quick." FYSA is the only one that has told me what the terms mean, how to calculate the "fundamentals", and where/how to research a company. It also gives examples of value and growth strategies. It doesn't, ever, tell you what you need to do to get rich, but rather, what you need to do to make informed decisions. Mix in "common sense" and your own opinions and your off! * Yes, I've read (most of) a Kramer book, too. Avoid at all costs. The only useful advice: buy and research (not buy and hold), it is possible to make money in down markets too, and sometimes its better to be in cash instead of stocks while you find your next position. The other 350 pages is about how EASY it is too make MAAAAD MOOOONNEY. Don't you want MAAAAD MOOOONNNNETY??!?11
furiouslol 18y ago
The secret to building a sustainable growing investment portfolio: DCF
- tocomment1 18y ago
  Explain
  - byrneseyeview 18y ago
    He may be suggesting that you buy some Dohar Cattle Feed Company stock (that's what I get when I search Google Finance for 'DCF'), but it's probably a reference to discounted cash flow, a very useful tool for evaluating certain business. The idea of DCF is to split up the value of an investment into chunks of future cash flow, and ask yourself how much you'd pay for each chunk. For a simple example, if you have a business that's sure to pay you $100, once, a year from now, you ask yourself: how much would I have to put in the bank, now, to get $100 on that date? That amount is the present value of that cash flow. Now consider a business that will pay that same certain $100, but after two years. The principle is the same -- how much would you put into a bank account now to get that same $100 on the same date? To further complicate things, imagine that you're betting on a coin flip: two years from now, you will get either $100 (heads) or $0 (tails). To figure out the net present value, you'd first determine the average outcome ($50), then decide how much you'd have to put in a risk-free account now to get that amount in two years.* Put these together, and you can understand the DCF framework. Let's say you have a business that earned $100 last year, and that you expect to earn about 5% more each year thereafter. But in any given year, there's a 10% chance that the business will go under. The discounted future value is that same procedure, repeated for each year: the price you should pay is how much you'd invest in a bank account now for a 90% chance of $105 in a year, plus an 81% chance of $110.25 in two years, etc., or sum(100 * 1.05^n * .9^n * [1 - risk-free interest rate]^n). So now all you have to do is 1) figure out what the business will earn every year from now until the end of time, and 2) figure out the intrinsic value of a given sum of money to be delivered at a given future date. These are both, of course, impossible. But rough estimates get you pretty close to where you need to be, and it provides a good way to compare two stable-growth businesses in the same industry (how much should you pay for a soft drink company growing at 3% each year, versus an otherwise identical company growing at 5% each year, for example?). * This assumes you have an infinite tolerance for risk. But a one in a billion chance of one billion dollars is probably not worth a dollar -- or, rather, it's worth more than a dollar if you enjoy gambling, and less than a dollar if you intend to retire on it. Edit: replaced a second '$105' with the correct number, $110.25.
chwolfe 18y ago
"What about fundamentals? Fundamentals is a word invented by sellers to find buyers."
- fallentimes 18y ago
  I used to work in the finance & investing industry before doing a startup. The slimy, misleading marketing proliferating itself everywhere is absolutely ridiculous. They're even pretentious enough to call their fees and back loaded funds "products". If you've ever seen the movie Boiler Room, my second finance job was similar. My third finance job had similarities to Barbarians at the Gate (on a much lower scale) and the classic tulip bulb story: http://en.wikipedia.org/wiki/Tulip_mania http://en.wikipedia.org/wiki/Tulip_mania Strange world is the finance.
comatose_kid 18y ago
The points he makes at the end of his "My Investment advice for 2006" are dead-on, especially points 2 and 3. Investing well in the market requires a lot of time - saving money doesn't, and investing in yourself (side projects for example) probably has the greatest potential for wealth generation.
mikesabat 18y ago
This is a very well reasoned argument although it is rather depressing. I'm actively evaluating a few stocks to invest my meager savings. Mark Cuban has made me think one thing... bonds.

48 points by prakash 18y ago

I personally couldn't entrust my wealth to someone named "Raleigh Rails." But then I don't actually have any wealth.

I had read A Random Walk Down Wall Street in college. I truly thought that the markets were efficient, that any available knowledge about a company was already reflected in its stock price. Yet I saw Raleigh using the information I gave him to make money for his clients. Heh, that's exactly what I'm experiencing now. I've always bought the efficient markets hypothesis (i.e., that current prices already factor in all available information). But, I've been meeting analysts who are supposedly experts in their respective fields, and I've come to a simple conclusion: they can't interpret the information they're given. They are the kind of people who consider valuation by a constant multiple of eyeballs to be legitimate. They are the pointy-haired-bosses of the world, who read a few trade rags and think they are experts. In one light, it's all rather depressing. In another, it seems like a great opportunity ;-)

ntoshev 18y ago
In order to exploit the "inefficient market hypothesis", you need to know what information is reflected in stock price and what is not. This means you need to know the market, not just the stock.
- byrneseyeview 18y ago
  I'm not sure that's true. e.g. if you have a company that has real estate worth $10/share, and a business that's worth $10/share, and the stock trades at $15, you don't really need to know whether the market underestimates the real estate, underestimates the business, or some combination of the two. I guess for certain kinds of dirty hedges (e.g. trading the crack spread and trading oil refinery stocks) you might need to know that.
  - ntoshev 18y ago
    You don't have complete information, so the market may know something about the stock that you don't. Even if you're right, the market can stay irrational longer than you can stay solvent. So you do need to know the market.
    - byrneseyeview 18y ago
      That's true. And I may know something about the stock that the market doesn't. It's pretty impractical to make your decisions by finding out that everyone else is wrong, rather than by ensuring that you're right (or as right as you can be). It doesn't scale, either -- AT&T used to have over a million shareholders, and interviewing every one of them about whether Ma Bell was going to raise their dividend next quarter sounds like a real chore. Even if you're right, the market can stay irrational longer than you can stay solvent. If you're leveraged, yes. If you aren't leveraged, you're going to be solvent forever. And anyway, arguing about the timing obscures the real decision -- I wouldn't discourage someone from pursuing a career because I didn't know whether or not every employer would recognize their talent after the first interview.
  - steveplace 18y ago
    The market is the inefficiency, not the stock. In order to exploit these iniffeciencies, you need to decouple the fundamentals of the underlying company with the fundamentals of the market. The price at which a financial instrument trades is simply the sum of the market supply and demand. That's the big secret. If supply runs out and demand is still there, the price will go up until someone is willing to supply more stock.
    - byrneseyeview 18y ago
      That's true, but it sounds like you're talking more about speculation (guessing prices irrespective of values) rather than investing (purchasing when the price does not reflect full value).
pragmatic 18y ago
A Random Walk and Efficient Market Theory are misunderstood and misrepresented. People equate efficient market with perfect market, meaning the market "knows" the right price. All that efficient market theory states is that information is communicated efficiently, not that the information is correct. Other bubbles would never happen. Proponents state that prices are only correct in the long run. Malkiel (author of A Random Walk) advocates whole market index funds simply because you cannot know what information is correct and beating the market is a fool's errand. Again the case in point being the irrational run up in tech stocks not based on fundamentals but based on the greater fool theory. Information as pricing was communicated effectively but the information is not guaranteed to be either correct or rational. The stock market is a weighing machine not a voting machine - Benjamin Graham. However, I do enjoy Cuban's take on this as he's been there and down that. I think he could write a great book at some point.

fallentimes 18y ago

I agree with most of what he writes, other than his dividends vs share buybacks commentary. I'm glad he published the descending comments though. A few quick thoughts: 1. Dividends are taxed, share buybacks are not. This is why in cases where a mature Company is sitting on a large pile of cash with little to no long term debt, share buybacks provide more value by avoiding the tax man. 2. If the management team truly believes the company is undervalued, buying shares back makes a lot of sense, especially for mature companies. However, if the buy back leads to incentive bonuses for the management team I'm 100% against it. Also, it's a lot more telling when a Company does this during a recession than a boom. 3. As alluded to in the comments, corporate earnings are relatively worthless without a cash flow statement for the same time period.

bokonist 18y ago
A stock buyback only increases the fundamental value of the company if it results in an increase in dividends per share. A company that buys back stock instead of paying dividends, and also has no intention of ever paying dividends, would only be valuable in the way a baseball card is valuable.
- fallentimes 18y ago
  Right, which is why I said "mature company" (who is hopefully, by then, issueing dividends :-D). At the same time, if a company issues dividends it can't afford to pay (cough Citi cough) this can be devastating to a Company's prospects. At it's core, the whole reason stocks are worth anything to begin with is the anticipation of future dividends (DCF).

viae 18y ago

I've been reading about stock trading over the last couple months, as time allows, thanks to Metlife managing my 403b to a phenomenal 1% growth over 5 years. Hands down the best book I've read so far is, Fire Your Stock Analyst: Analyzing Stocks On Your Own (Definitive Guides (Financial Times/Prentice Hall).* All other books I've seen are "get rich quick." FYSA is the only one that has told me what the terms mean, how to calculate the "fundamentals", and where/how to research a company. It also gives examples of value and growth strategies. It doesn't, ever, tell you what you need to do to get rich, but rather, what you need to do to make informed decisions. Mix in "common sense" and your own opinions and your off! * Yes, I've read (most of) a Kramer book, too. Avoid at all costs. The only useful advice: buy and research (not buy and hold), it is possible to make money in down markets too, and sometimes its better to be in cash instead of stocks while you find your next position. The other 350 pages is about how EASY it is too make MAAAAD MOOOONNEY. Don't you want MAAAAD MOOOONNNNETY??!?11

furiouslol 18y ago

The secret to building a sustainable growing investment portfolio: DCF

tocomment1 18y ago
Explain
- byrneseyeview 18y ago
  He may be suggesting that you buy some Dohar Cattle Feed Company stock (that's what I get when I search Google Finance for 'DCF'), but it's probably a reference to discounted cash flow, a very useful tool for evaluating certain business. The idea of DCF is to split up the value of an investment into chunks of future cash flow, and ask yourself how much you'd pay for each chunk. For a simple example, if you have a business that's sure to pay you $100, once, a year from now, you ask yourself: how much would I have to put in the bank, now, to get $100 on that date? That amount is the present value of that cash flow. Now consider a business that will pay that same certain $100, but after two years. The principle is the same -- how much would you put into a bank account now to get that same $100 on the same date? To further complicate things, imagine that you're betting on a coin flip: two years from now, you will get either $100 (heads) or $0 (tails). To figure out the net present value, you'd first determine the average outcome ($50), then decide how much you'd have to put in a risk-free account now to get that amount in two years.* Put these together, and you can understand the DCF framework. Let's say you have a business that earned $100 last year, and that you expect to earn about 5% more each year thereafter. But in any given year, there's a 10% chance that the business will go under. The discounted future value is that same procedure, repeated for each year: the price you should pay is how much you'd invest in a bank account now for a 90% chance of $105 in a year, plus an 81% chance of $110.25 in two years, etc., or sum(100 * 1.05^n * .9^n * [1 - risk-free interest rate]^n). So now all you have to do is 1) figure out what the business will earn every year from now until the end of time, and 2) figure out the intrinsic value of a given sum of money to be delivered at a given future date. These are both, of course, impossible. But rough estimates get you pretty close to where you need to be, and it provides a good way to compare two stable-growth businesses in the same industry (how much should you pay for a soft drink company growing at 3% each year, versus an otherwise identical company growing at 5% each year, for example?). * This assumes you have an infinite tolerance for risk. But a one in a billion chance of one billion dollars is probably not worth a dollar -- or, rather, it's worth more than a dollar if you enjoy gambling, and less than a dollar if you intend to retire on it. Edit: replaced a second '$105' with the correct number, $110.25.

chwolfe 18y ago

"What about fundamentals? Fundamentals is a word invented by sellers to find buyers."

fallentimes 18y ago
I used to work in the finance & investing industry before doing a startup. The slimy, misleading marketing proliferating itself everywhere is absolutely ridiculous. They're even pretentious enough to call their fees and back loaded funds "products". If you've ever seen the movie Boiler Room, my second finance job was similar. My third finance job had similarities to Barbarians at the Gate (on a much lower scale) and the classic tulip bulb story: http://en.wikipedia.org/wiki/Tulip_mania http://en.wikipedia.org/wiki/Tulip_mania Strange world is the finance.

comatose_kid 18y ago

The points he makes at the end of his "My Investment advice for 2006" are dead-on, especially points 2 and 3. Investing well in the market requires a lot of time - saving money doesn't, and investing in yourself (side projects for example) probably has the greatest potential for wealth generation.

mikesabat 18y ago

This is a very well reasoned argument although it is rather depressing. I'm actively evaluating a few stocks to invest my meager savings. Mark Cuban has made me think one thing... bonds.