Oh for sure. My point was just that they are not related much.
Every day and always there are examples of stocks where the price (of the
stock) is generally thought to be way to hell off any 'rational' if you
will (in your sense). Netscape being a perfect example. At the time of the
initial IPO .. now the consensus of opinion (nothing more than that) is
that the price is OKish.
>at least I hope not. Microsoft's
>stock price continues to climb (and is about to split) at least in large
>part because Microsoft is making a lot of money shipping a product that
>people are actually buying.
Sure. here are some other historic and very current, topical reasons that
certain stock prices soar:
* a fantastic advertising campaign
* current affairs & news of the world relating to the business
* certain personnel moves on a high level
* union activity
* (and often) 'segment' driven matters
My main poiunt would be this, and IMHO it is a real core 'concept' in the
market.
A stock IS very much "a stock", it is a piece of paper. You are trading
the stock, not the company. All sorts of wierd things have value for wierd
reasons (Poppys in 16th C. holland, currency, gold (utterly useless but
spectacularly valuable) etc etc)
I really think it is key to realize that a stock, one share, is in fact a
'share'. For instance a US Dollar is a 'dollar' (a bit of paper), it's not
a US. A Netscape 'share' is a 'share', its not a 'Netscape'.
'shares' really are ;'things'. the market is for netscape 'shares', not
for 'netscapes'.
You may resist this notion, but observe that particularly in todays
sophisticated (or whatever!) market, the abstraction of shares becomes, not
so much more and more important, but actually what goes on from day to day.
Options, arbitrage, futures, not to mention derivatives are the market.
>Similarly, Apple's price can be somewhat
>related to real-world facts about products: they guessed badly about
>consumer demands in basically all of the last 6 quarters; they picked the
>wrong time to ship a crucial OS upgrade another year late; they got nailed
>in the recent Japanese-currency inflation; they don't have sufficient
>profit margin on their products to create much positive revenue (and it is
>unclear whether dumping half their products will fix this); and so on.
>Sure, they're sitting on lots of money, but there doesn't seem to be an
>obvious scenario by which they can ever make _more_ money.
>
>> 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.
>
>(Well, if insider trading really does dominate the market, then once again
>all bets are off. Again, I hope that capitalism isn't quite this corrupt.)
>
Why? its a silly anachronism that 'insider' trading should be
>> 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).
>
>Case in point: Netscape's stock price, aside from initial snowball-effects
>(people buying because everyone else is buying and thus the price is
>going up no matter what) is at this point based on theories (dumb
>theories, we think, but still theories) about the future financial
>performance of the company. Sure, it's creating precisely zero revenues
>right now, but now that the first-day roller-coaster is over, the people
>still holding stock at $125 per are assuming that the company will one
>day generate enough revenue to make those $125 pieces of paper not only
>justified, but actually increase in value. Unless they're all insane.
>
>> 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.
>
>OK, granted, day-to-day individual acts of buying and selling are probably
>all this sort of weird unreal meta-trading. But at some point, in the
>long run, the long-term value shifts have to be constrained by real-world
>considerations like whether or not anybody is buying the damned products.
>
>Hmm.
>
>Or do they? On the model we're both discussing, the cause-and-effect
>chains are pretty strange: it looks like revenue projections affect stock
>price _only_ because everyone agrees that they should and so can make bets
>about other peoples' bets based on this assumption about other people
>making _their_ bets on the same basis, and so on forever. But then there
>is no force preventing the entire market from sliding over into, say,
>making stock-price bets based on the phases of the moon (if everyone did
>that, it would work just as well as revenue figures; both are just types
>of publicly available information), and thus the only reason that
>corporate revenues and annual reports matter to the stock market at all is
>simply pure convention.
>
>But this model must be oversimplified. Because that's just insane.
>
>--
>Evan Kirchhoff, kirchh@umich.edu
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