Picture the following hypothetical.
I tell you:
Evan, stock X is today priced at $20. I know for a fact (let's say,
hypothetically, it's because I have a time machine - but, the point is, it
is an absolute fact) that stock X will be priced at $40 Tuesday week at 2
in the afternoon.
What do you do?
What does company health, the weather, my eye color or anything else have
to do with it?
You mention company health. One of the (sundry) ways stock market gamblers
(ie, those that run the magellan fund, the little man in the next room,
jobbers, etc etc) make their bets is measuring company health.
Many analysts or fund managers particularly lean to that. Many don't.
In London over the last few years astrology was quite popular for awhile.
(The 'science' is as impeccable as any other idiotic idea about predicting
the future, such as company health - everyone's following the same
astrology advice so the price will move with it.)
Back in the now-known-as-the robber barron days, if you had mentioned your
theory that "stock market valuation is a serious measure of what
speculative investors think of a company's health" people would have simply
looked at you oddly.
The biggest plays on the markets (other than mutual funds moving money) are
invariably inside plays. {The pharse of trying to prevent inside trading
is, indeed, a pharse, but that's another story ... <: } , which dont have
anything to do with company 'health' or other analysis.
I may be mistaken but you were pointing out how hopeless Netscape stock
would be, how ludicrously overvalued it was, and so on & so forth, at the
time of the IPO (perhaps on the basis of Netscape's pathetic 'health', ie,
zero incoming moneys).
You have to realize somethign shockingly, sort of enlighteningly basic ...
money (printed currency ... money, bank accounts, legal tender ..) money
is _totally_ psychological. It's power is amazing!
As tender, so shares ..
>This would include (i)
>people with more background knowledge than either of us, or at least (ii)
>people who have actually read the Apple annual reports and have gotten all
>the numbers, not just the Apple-boosting ones. Yes, technology investors
>tend to be twitchy and to run in silly faddish packs, but if Apple's
>status was as uncompromisingly rosy as your numbers make it out to be, the
>twitchy faddish investors would be rushing _towards_ it in packs, driving
>its price up closer to Netscape's. So at the very least, a 50% plunge in
>stock price in a year is a reasonably reliable sign that the company is
>not exhuding an air of healthiness.
>
>On the other hand, Apple PR happyspeak about cash reserves would seem to
>be somewhat less reliable. I know which one I'd pay attention to if I
>was thinking about putting my money on the line buying Apple stock. Or
>Apple computers.
>
>> I think I'll assume that your understanding of stock market performance and
>> it's relationship to the real (ie physical) economy
>
>What exactly do you think all those traders are doing down there on the
>floor, playing some kind of spectator sport in loud jackets for the south
>Manhattan tourists? :)
Floor traders, jobbers and the market makers who run each stock, are the
ones who are closest to the psychology of shares and the least totally
interested in odd little tidbits such as 'company health' or 'astrological
picks' or even 'insider information'.
Floor tradesr simply sit around and wait until a stock is moving in price.
Then you try to buy some and sell it again quickly whilst it's still moving
the same way you thoguht it was.
Not much relationship to the underlying companies or anything much else.
>Excuse my Little Golden Book knowledge of
>capitalism, but I'm pretty sure it works something like this:
>
>(1) Corporations are the backbone of the modern economy, and are
>responsible for much of the activity therein.
>
>(2) Most large corporations are publicly traded -- that is, the primary
>source of their operating capital is money given to them by stockholders.
>
>(3) Therefore, much of the "real" economy (or at least the portions of it
>relevant to this argument) is run entirely for the benefit of
>stockholders. Every corporate decision is made on this basis, period.
>(Let's leave aside the problem of boards of directors being corrupt
>puppets of management and thus failing to represent stockholders'
>interests adequately).
>
>(4) Stockholders invest money expecting to get more money back, not
>less. They don't really care about the moral right of "good" companies
>to survive and produce competing computer platforms.
>
>(5) Therefore, a company that takes stockholders' money and promptly
>makes half of it vanish is in no sense a healthy, functioning company,
>since its _only_ goal (namely: making money for stockholders) has
>completely failed. The only reason not to rip it up and sell it for
>parts immediately is the chance that one day in the future the intact
>company might produce more money for the stockholders than the ripped-up
>bits would bring right now at a fire sale. The likelihood of this
>happening tends to seem smaller as time goes on, and at some point a
>company that can't bring its stock price back up to hopeful levels _will_
>get ripped up and sold for parts, just to cut everyone's losses. If
>management is not willing to rip the company up when this point is
>reached, the board of directors should fire them and replace them with
>somebody who will.
>
>Somebody correct me if I'm wrong about any of this.
>
>> is more sophisticated
>> than that, and you're making this point just to advance (if that's the
>> word) your arguement...
> ^^^ (s.b. "argument")
>
>And a patronizing good morning to you, too! ;)
>
>--
>Evan Kirchhoff, kirchh@umich.edu
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