5 ms·

Perception of business value can change quickly. Actual business value itself does not tend to change so fast. Dumping your Google stock if oil drops below $70

by jkahn 15y ago

Perception of business value can change quickly. Actual business value itself does not tend to change so fast. Dumping your Google stock if oil drops below $70 per barrel is solely based on your own perception and your own trading rules. The value of Google's products remain the same. If a competitor releases a new device, that is based in human time. Does it make a difference if you sell at 12.01pm after a competitor's product announcement rather than 1pm? Right now, yes. Do I think it should? No. The reason prices swing so quickly is because trades happen so quickly. If trading was slowed down, prices would not swing as quickly. The current situation reinforces a vicious cycle where the fastest trader has an advantage in the market. Public share prices is a measure of how much the company is worth to people that buy shares not of how much value the company creates by selling their products. PepsiCo should be valued on how well they sell soft drink, not millisecond-by-millisecond analysis of unrelated issues.

hendzen 15y ago
There is no such thing as 'actual business value'. The very definition of value is based on perception; something of value is something people want. The closest concept I can think of to what you mean is "book value", which comes with its own set of drawbacks.
feral 15y ago
But what is 'actual business value'? Lets say we are considering an oil company, which makes a profit from drilling oil. If oil rises in price, the company makes more profit. Surely, in a very real sense, the 'actual business value' of this company, depends on the price of oil? Lets talk about PepsiCo. The weather service detects a new hurricane forming off the coast of Florida, sending orange juice futures up. At some discrete point in time, the weather forecast computer model spits out its results, and that information is on its way to becoming public, and there's going to be a fast change in the price of oranges, and hence the value of PepsiCo. Here is an article, describing just such an event: " Orange juice futures hit a three-year high on Tuesday as speculators eyed the development of a Caribbean storm that meteorologists said had a chance of moving towards Florida. Orange juice is a $20bn industry with prices affecting farmers in Florida and Brazil, processors, trading houses and bottlers such as Coca-Cola and PepsiCo. " http://www.ft.com/intl/cms/s/0/1831a65c-c5a8-11df-ab48-00144feab49a.html#axzz1aL68Vqqf http://www.ft.com/intl/cms/s/0/1831a65c-c5a8-11df-ab48-00144... Now, lets look at Google. Lets say Google does better in a more buoyant economy, because they get more ads (maybe the opposite happens in real life; but its just an example). And the drop in the price of oil has given me information that others think the economy is tanking. Hasn't the 'actual business value' of Google changed, in a very real sense? And quickly? You might argue, if you believed in a deterministic universe, that the value of Google hasn't changed - the economy was always going to tank, because the universe only plays out one way. But that's irrelevant, because we don't have access to such a model of the universe. What we have to make decisions on is the information we have access to, which can change suddenly, and which the markets do a good job of aggregating. I'm not trying to argue for front running the trades in the market or anything like that. I'm just trying to argue that business value can change rapidly. I think the reason prices change so quickly is because aggregated belief about the value of companies changes so quickly, and because our markets allow that change in aggregated belief to be quickly expressed. If you slowed trading down, so that it happened hourly, as you might propose, what this would mean is that the price of PepsiCo is essentially out-of-date for an hour. I could no longer look at the price of PepsiCo on the market, and assume it was doing a reasonable job of aggregating the public information about the future prospects of PepsiCo - I'd have to imagine it was an hour out of date. This would probably make the market less useful.

by jkahn 15y ago

hendzen 15y ago

There is no such thing as 'actual business value'. The very definition of value is based on perception; something of value is something people want. The closest concept I can think of to what you mean is "book value", which comes with its own set of drawbacks.

feral 15y ago

But what is 'actual business value'? Lets say we are considering an oil company, which makes a profit from drilling oil. If oil rises in price, the company makes more profit. Surely, in a very real sense, the 'actual business value' of this company, depends on the price of oil? Lets talk about PepsiCo. The weather service detects a new hurricane forming off the coast of Florida, sending orange juice futures up. At some discrete point in time, the weather forecast computer model spits out its results, and that information is on its way to becoming public, and there's going to be a fast change in the price of oranges, and hence the value of PepsiCo. Here is an article, describing just such an event: " Orange juice futures hit a three-year high on Tuesday as speculators eyed the development of a Caribbean storm that meteorologists said had a chance of moving towards Florida. Orange juice is a $20bn industry with prices affecting farmers in Florida and Brazil, processors, trading houses and bottlers such as Coca-Cola and PepsiCo. " http://www.ft.com/intl/cms/s/0/1831a65c-c5a8-11df-ab48-00144feab49a.html#axzz1aL68Vqqf http://www.ft.com/intl/cms/s/0/1831a65c-c5a8-11df-ab48-00144... Now, lets look at Google. Lets say Google does better in a more buoyant economy, because they get more ads (maybe the opposite happens in real life; but its just an example). And the drop in the price of oil has given me information that others think the economy is tanking. Hasn't the 'actual business value' of Google changed, in a very real sense? And quickly? You might argue, if you believed in a deterministic universe, that the value of Google hasn't changed - the economy was always going to tank, because the universe only plays out one way. But that's irrelevant, because we don't have access to such a model of the universe. What we have to make decisions on is the information we have access to, which can change suddenly, and which the markets do a good job of aggregating. I'm not trying to argue for front running the trades in the market or anything like that. I'm just trying to argue that business value can change rapidly. I think the reason prices change so quickly is because aggregated belief about the value of companies changes so quickly, and because our markets allow that change in aggregated belief to be quickly expressed. If you slowed trading down, so that it happened hourly, as you might propose, what this would mean is that the price of PepsiCo is essentially out-of-date for an hour. I could no longer look at the price of PepsiCo on the market, and assume it was doing a reasonable job of aggregating the public information about the future prospects of PepsiCo - I'd have to imagine it was an hour out of date. This would probably make the market less useful.