4 ms·

I agree he allocated resources by buying/selling assets, but nowhere in the purchase/sale of those assets is value created. Prices move, but value isn't created

by condor 18y ago

I agree he allocated resources by buying/selling assets, but nowhere in the purchase/sale of those assets is value created. Prices move, but value isn't created, the underlying assets don't generate anymore than they would have had he not purchased or sold them. GOOG trading at 700 vs 200 doesn't create value, GOOG will still earn the same amount in the future whether it trades at 200 or 700. Please take some time to think about this.

axiom 18y ago
Suppose there's an economy where everyone is spending 80% of their energy building refrigerators. All day that's what people are doing. Nobody actually needs these refrigerators, so they just keep building them and stacking them up in the corner. Then one day an intrepid young entrepreneur decides "hey, this whole refrigerator building thing is kind of silly. It's kind of a waste of resources. I think I'll start betting against refrigerator companies." Then he takes a whole bunch of money (that's not currently tied up in building refrigerators of course) and short sells the stocks of companies that make refrigerators. This causes their stock price to go down a bit (or rather, to go up more slowly) which drives money out of refrigerator building and into other things, like making televisions or something. A year or two pass and suddenly everyone has an epiphany. All these refrigerators everyone has been building and stacking neatly in the corner aren't actually worth $2000 apiece. In fact, since there's so damn many of them, they're only worth like $3.50! the economy crashes! all the refrigerator companies go out of business! all the investors in refrigerator companies lose their shirts! people are committing suicide left and right because their refrigerator stockpiles are suddenly worth nothing! But our intrepid entrepreneur is doing quite well. You see, all that money he drove into making televisions was safe because the value of televisions was not inflated. TV's were actually worth $1000 apiece, and there was no oversupply of TVs so their price stayed at $1000. So what was the value of the entrepreneur's work? well, he kept a whole bunch of energy from being expended on building stockpiles of refrigerators. He didn't himself go out and build televisions or anything. No, his labor was more abstract and more intellectual, but still quite valuable. Resource allocation is everything.
- gaius 18y ago
  Replace refrigerators with tractors and that's pretty much what happened in the USSR.
1gor 18y ago
You are deeply mistaken in thinking that share prices have no influence on value creation. Let me explain using your example. Imagine that GOOG has a few projects in the pipeline. A few bad ones, and a few brilliant ones. When GOOG share price is at 700, GOOG can issue 100 shares and raise 70000. Plenty of money to throw at good and bad projects. If GOOG share price was at 200 they would raise less than 1/3 of the money, and be very picky at what projects to fund. Only the best project would get funded. Think about how much resources are wasted in the society though misallocation of capital due to inflated asset prices. You may look at short sellers in a completely new light.
- sokoloff 18y ago
  If GOOG could tell, with certainty, ahead of time what projects were brilliant and which ones were bad, they'd only fund the brilliant ones in the first place, right? The notion that GOOG is knowingly chasing bad projects solely because their stock price is high seems absurd. I think it's more likely that they just don't, and can't, know ahead of times what's going to stick.
- condor 18y ago
  never said capital (or access to capital) doesn't influence value creation. it can negatively or positively affect value creation depending on how that capital is allocated. however the act of capital allocation does not create value. why is that so difficult to understand? im not saying capital allocation isn't important, however its one means to an end (value creation).

by condor 18y ago

axiom 18y ago

Suppose there's an economy where everyone is spending 80% of their energy building refrigerators. All day that's what people are doing. Nobody actually needs these refrigerators, so they just keep building them and stacking them up in the corner. Then one day an intrepid young entrepreneur decides "hey, this whole refrigerator building thing is kind of silly. It's kind of a waste of resources. I think I'll start betting against refrigerator companies." Then he takes a whole bunch of money (that's not currently tied up in building refrigerators of course) and short sells the stocks of companies that make refrigerators. This causes their stock price to go down a bit (or rather, to go up more slowly) which drives money out of refrigerator building and into other things, like making televisions or something. A year or two pass and suddenly everyone has an epiphany. All these refrigerators everyone has been building and stacking neatly in the corner aren't actually worth $2000 apiece. In fact, since there's so damn many of them, they're only worth like $3.50! the economy crashes! all the refrigerator companies go out of business! all the investors in refrigerator companies lose their shirts! people are committing suicide left and right because their refrigerator stockpiles are suddenly worth nothing! But our intrepid entrepreneur is doing quite well. You see, all that money he drove into making televisions was safe because the value of televisions was not inflated. TV's were actually worth $1000 apiece, and there was no oversupply of TVs so their price stayed at $1000. So what was the value of the entrepreneur's work? well, he kept a whole bunch of energy from being expended on building stockpiles of refrigerators. He didn't himself go out and build televisions or anything. No, his labor was more abstract and more intellectual, but still quite valuable. Resource allocation is everything.

gaius 18y ago
Replace refrigerators with tractors and that's pretty much what happened in the USSR.

1gor 18y ago

You are deeply mistaken in thinking that share prices have no influence on value creation. Let me explain using your example. Imagine that GOOG has a few projects in the pipeline. A few bad ones, and a few brilliant ones. When GOOG share price is at 700, GOOG can issue 100 shares and raise 70000. Plenty of money to throw at good and bad projects. If GOOG share price was at 200 they would raise less than 1/3 of the money, and be very picky at what projects to fund. Only the best project would get funded. Think about how much resources are wasted in the society though misallocation of capital due to inflated asset prices. You may look at short sellers in a completely new light.

sokoloff 18y ago
If GOOG could tell, with certainty, ahead of time what projects were brilliant and which ones were bad, they'd only fund the brilliant ones in the first place, right? The notion that GOOG is knowingly chasing bad projects solely because their stock price is high seems absurd. I think it's more likely that they just don't, and can't, know ahead of times what's going to stick.
condor 18y ago
never said capital (or access to capital) doesn't influence value creation. it can negatively or positively affect value creation depending on how that capital is allocated. however the act of capital allocation does not create value. why is that so difficult to understand? im not saying capital allocation isn't important, however its one means to an end (value creation).