From: Emlyn O'regan (oregan.emlyn@healthsolve.com.au)
Date: Thu Sep 12 2002 - 21:51:26 MDT
gts wrote:
>
> Lee Daniel Crocker wrote:
>
> > I agree to the extent that some of the value of a stock represents
> > liquidatable assets of the company: physical things and
> cash it owns,
> > contracts, and even some intangible things like "goodwill".
>
> Yes.
>
> > But I was trying to answer the original question that started
> > this thread: what value is there in stock /ownership/? The stock's
> > value that represents assets can only be realized by selling the
> stock.
>
> You answered your own question. The value of stock ownership
> is that one
> can eventually sell the stock for a profit (and possibly earn
> dividends
> in the meantime).
>
AFAIK, the price of stock is purely what someone else will pay for it. If
you value stock because you think you can sell it for a particular amount,
then your valuation on the stock is based entirely on your perception of
other people's valuation of the stock.
Many people appear to value stock purely for the reasons stated above. Note
that the company that issued the stock does not directly affect these sock
holders at all. They may as well be trading baseball cards.
Sometimes people value stock at least partially for some reason directly
related to the company. For instance, the company may issue dividends, and
link those to profits. So the company can directly affect how those people
will value the stock (or less indirectly; those people must also judge how
well they believe promises that the company makes about its future
behaviour).
Also, it has been passingly mentioned that some people value a controlling
interest in a company, because they might want to directly control it. They
may want to merge it with another company, directly get control of its
profits, sell off its assets, whatever. Those people will likely also value
the future probability of gaining control.
Dividends and controlling interest are couple of ways that the valuation of
stock can be grounded in something other than perception of other people's
valuation of said stock. In what is a highly inductive calculation
(individual valuation of stocks -> aggregate valuation of stocks), these
kinds of valuations must be some kind of base case upon from which the
induction proceeds. Note that this doesn't imply that the system result will
necessarily have any measurable relationship to the base cases, given lots
of iterations and the likelihood that those so-called base valuations are
actually also affected by perceived aggregate behaviour.
I think that valuation bubbles, which eventually burst, come from too many
people basing personal valuations purely on perceptions of other people's
personal valuations; everybody expects the price to rise, so they buy at any
price, and the price does indeed go up and up... except that scarily
subjective words like "confidence" creep in; the bubble can burst because of
a few gloomy words in the media, or someone crashes a plane in a building.
As soon as enough people begin to think that those stocks might not
appreciate, they being to try to sell, and everyone else gets the message...
hooha!
Anyway, back to the conversation at hand. It seems that people are trying to
figure out where these valuations based on perceptions of others' valuations
anchor back to reality. I think the answer is that it doesn't necessarily
anchor at all (think '99). Where prices do relate to the real
state/behaviour of a company, they only really seem to do so because enough
people adjust their estimation of what other people value stock at based on
that behaviour.
So what is the value of stock? It's the value you put on it. In speculation,
its what you think you can get for it. The value of owning a stock is the
future amount that you think you can get, less the amount you paid,
converting future and past dollars to comparable values, and modified by
cost of ownership (eg: repaying a loan used to buy the stock, eg2:
opportunity cost), and the benefits of ownership (dividends, discounts,
etc).
The tricky bit is that this house of cards can yield real money. Valuations
based on the perceived valuations of others seem shonky, but after the fact,
gains made are absolutely real.
Emlyn
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