3 ms·
Yes he is wrong. This is a non-sequitur. He is offering a conclusion that does not follow from his argument. Why should the lack of liquidity cause a bubble? Us
by hristov 12y ago
Yes he is wrong. This is a non-sequitur. He is offering a conclusion that does not follow from his argument. Why should the lack of liquidity cause a bubble? Usually lack of liquidity acts in the opposite direction. It causes prices to go down not up.
Furthermore, the bubble dynamic usually requires liquidity. The bubble dynamic happens when prices are going up so much that participants do not care about an underlying valuation but are certain they will be able to sell in the near future for a higher price due to the market momentum. This whole way of thinking, requires liquidity.
If there is indeed a bubble, I do not see how it can logically be caused by lack of liquidity.
- deleted 12y ago[deleted]
- waps 12y agoThis is a misunderstanding. Lack of liquidity can cause both. You forget that prices are valuations and are very different from prices actually paid. Simply put: 1) valuation = price of last share sold * number of shares 2) value = price at least one buyer is prepared to pay for the entire company Lack of liquidity in private companies generally comes from the fact that you can't buy or sell shares without agreement from the board. So "price of last share sold" is quite simply directly set by the board, people who have a vested interest in this number being as high as possible. It is normal for valuation to be larger than value (for public companies), but not by much. You could actually buy (very nearly) all of Microsoft for 360 billion dollars (it's market cap). A bubble can probably be best defined as valuation >> value.