This is a great example of how the stock market is not about fundamentals, just like Bitcoin, it’s all about popularity and perception.
In the end, people don’t care if the “stock is really worth” the price, they only care if themselves or someone else are willing to pay the price, nothing else really matters.
Since we're doing JMK quotes, he also said "Capitalism is the extraordinary belief that he nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all."
It seems "the long run" in the context of this quote is getting longer over the past 20 years (or more), with high multiples and companies that won't return the capital invested in them for many, many years, even in optimistic scenarios.
Does that mean the weighing part is becoming less important, and the voting part more so?
I'd say that it's always been about the long run; however, with (real) rates around, say, 5%, as in the 90s, what matters for the present value is mostly within the next 20 years. With rates about 1%, what happens after the next 50 years still determines more than half of your PV.
Do investors really think they can predict the income of a company in the 2070s with ANY degree of accuracy? None of the top five companies by market cap even existed 50 years ago.
That's my point - with high ("normal") interest rates, your horizon becomes shorter, what happens in 30+ years doesn't really matter, and the fundamental value of a share should become visible more quickly, so the uncertainty now is lower. With rates near zero, what happens in 50 years still matters, so who knows what the share should be worth today?
The fundamentals of bitcoin are illegal drug deals and money laundering. We can argue over how much that's worth, given the volume of BTC, and difficulty of the necessary conversion back to currency that banks/landlords/cafes/etc will accept, but that's not zero.
I don’t think that’s accurate anymore. Bitcoin ten years ago was like the www in 1995. Now we have DeFi which runs on crypto. DeFi is to banks what e-commerce was to retail stores in 2000.
To keep the analogies, GP asked if the Internet was useful for anything, I gave one - 'buying pizza on webpages' - and you're objecting to my use of the word 'webpage' vs 'app'.
Underneath all the talk of smart contracts running on ETH, behind DApps, the system at large skirts money laundering laws, and that's not a property of the system that conveniently just happened. A big reason for choosing crypto over something boring and normal, ie banks and the whole regulated financial industry, is because it skirts money laundering and other financial regulation, and because it's outside of the regulated financial industry, a lot of users don't believe they have to pay taxes on any gains made. For those that don't believe in the concept of taxes, that's very attractive.
That is true for businesses with "reasonable" P/E multiples of ~5 or less.
When a business has a P/E multiple of >100+, a significant portion of the investment is speculative rather than a rational projection assets and future earnings.
It's really hard to make a rational value fundamentals argument for why anyone is willing to invest in TSLA, with its current price putting its P/E of 1700.
What that means tangibly varies from business to business.
You might get a cut of the profits in the form of dividends... unless you don't. Plenty of stocks never pay dividends. A lot of companies pay more to charity than to dividends to investors.
Or, you get a vote on company policy at the stockholder's meeting... But if the founders own more than half the stock, that doesn't actually matter. And that's assuming the founders haven't just sold stock with no voting privileges.
If the company files for Chapter 7 bankruptcy, stock owners are entitled to company assets... And almost never see any, because they're last in line behind every other creditor.
So it's unclear what, precisely, the practical weight of "partial ownership in a real business" has in general. In specific, sure; stock could be access to dividends or a meaningful voice in company policy. For a lot of stock, the only real value is "How much will someone else pay me for this piece of the action?"
Well. If you hold the stock for long enough, over time its fundamental value will be realised.
To mangle something that Lincoln probably never said:
All the stock prices can be somewhat wrong for some time, and some stock prices can be very wrong all the time, but all stock prices can't be very wrong all the time.
You´re right in the short term. But in the long term the hope is that things average out and true value emerges as a function of countless transactions over years and years. Markets are a value ascribing heuristic machine. There is nothing about them that can deterministically point to objective value. However, the idea is that over a longer period of time, an approximation of true value emerges though wisdom of the crowd.
> Markets are a value ascribing heuristic machine. There is nothing about them that can deterministically point to objective value. However, the idea is that over a longer period of time, an approximation of true value emerges though wisdom of the crowd.
It's a beautiful idea in principle. Ultimately the reality that emerges will reflect the underlying values of the society.
Really makes you wonder about our values, given that presently emerging realities include an increasingly inhospitable homeworld.
I would say it's more than a hope. Any trader whose strategy is closer to optimal will have larger profits over time and come to own a larger and larger fraction of the market. Though saying that out loud makes me realize optimal doesn't have to mean buying and selling according to true value. Optimal would in fact be predicting the behavior of other participants and trading off those predictions. I still think certain events ground value though: bankruptcies, mergers, and dividends attach a real cost/gain to holding a stock.
"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." Keynes, 1936.
But what if retail investors start to make up a larger % of investors? Then the dominant philosophy is hype, popularity and trying to sell to a greater fool. This is already happening: retail investors are growing in number.
Originally, when institutions were the major players, stock prices followed fundamentals because most ppl cared about the revenue, earnings and cash flow. But what happens when the demographics change?
How confident are you that they followed fundamentals in any original setting? "Fundamentals" is just a collection of metrics and patterns a certain class of investor believes in. Usually those with most money and thus, power.
I think you have a rosier view of what drives most of our markets than what happens in reality. Look at the dot com bubbles. Look at how HFT firms make money by exploiting the tiniest of pricing discrepancies and leveraging them heavily. Or perhaps "analyst reports" that can make or break a stock because one person believes something and we give them a megaphone. We switched focuse from present earnings to forward looking revenue. We have stock buybacks. We applied large multiples to financially unsustainable businesses because "maybe one day they can monetize these millions of users with Ads". etc. etc.
The GFC was a game of trying to sell to the greater fool and involved intentional manipulation at the highest levels. It seems the system has been has always had these holes and it was "ok" until regular folks began to identify and act on these opportunities.
We likely wouldn't be having this conversation if another large hedge fund was making the play retail investors are today. We'd read articles talking about the public battle of the billions.
Reminds me of anytime a govt entity creates & exploits a backdoor and is surprised when other actors use the same door for their own activities.
No rosy view - hedge funds and algos follow momentum and copy each other as well. I actually agree with some of your points but was questioning OP. Sometimes I ask questions and present a counter-argument to understand another viewpoint better, not because it’s what I believe in.
In the end, people don’t care if the “stock is really worth” the price, they only care if themselves or someone else are willing to pay the price, nothing else really matters.