jackson@curium.DEC (SETH JACKSON 297-4751) (03/18/86)
>Someone mentioned that the stock market is just a present value machine >This can't be totally true, because then every stock with a given P/E >ratio would sell at exactly the same price, right? A quick glance >at the stock listings shows this not to be the case. Comments? > > Jeff Percival ...!uwvax!uwmacc!jwp Wrong. The price of a share of stock is the net present value of the company divided by the number of shares outstanding. Even if two companies had the same net present value (highly unlikely), their share prices would differ if they had a different number of shares outstanding. -- Seth Jackson
dsf@allegra.UUCP (David Fox) (03/19/86)
>>Someone mentioned that the stock market is just a present value machine >>This can't be totally true... >Wrong. The price of a share of stock is the net present value of the >company divided by the number of shares outstanding... If this were the case stock prices could not jump on good rumors nor plummet on bad rumors. Actually, the price of a share of stock is always whatever price one person is willing to buy at and and another is willing to sell at. This is to say that the stock market is a perceived value machine. The present value of the company only influences the price of the stock insofar as it influences the buyer's and seller's awareness. Other factors which influence the price of a stock are: - The prospects of the company - The prospects of the economy - The health of the president (of the United States) - The adjectives used most recently in news articles about the company - The opinion of Adam Smith - The weather - The phase of the moon - ... Well, that's my opinion, anyway.
res@ihlpl.UUCP (Rich Strebendt @ AT&T Information Systems - Indian Hill West; formerly) (03/20/86)
> > >Someone mentioned that the stock market is just a present value machine > >This can't be totally true, because then every stock with a given P/E > >ratio would sell at exactly the same price, right? A quick glance > >at the stock listings shows this not to be the case. Comments? > > Wrong. The price of a share of stock is the net present value of the > company divided by the number of shares outstanding. Even if two > companies had the same net present value (highly unlikely), their > share prices would differ if they had a different number of shares > outstanding. WRONG WRONG WRONG !!! The price of a share of stock reflects the OPINION of the most recent buyer of the stock as to a lower bound on the FUTURE value of the stock. This price has little (if any) relationship to the value of the company (hence the Grahame strategy of buying undervalued companies) or of any other RATIONAL attribute of the company. The value of a stock is set by EMOTION, not rationality. As an example, General Public Utilities of Pennsylvania stock dropped from something like 24 to 4 at the time of the Three Mile Island incident. Did the value of the company's assets (less its liabilities) really drop to 1/6th of what they were the day before? Not really. Did the incident have an EMOTIONAL impact? You betcha! I do not know what the stock is selling for today, but I expect that it has recovered a good bit, but is not yet up to the pre-incident price. The emotional reaction is wearing off, but is not yet gone. [This arguement is, of course, grossly oversimplified, but the basic thrust I think is valid.] This also explains (at least in part) why the market reacts to the changes in the economic indicators, the price of oil, and the direction of flatus outflow of Congressional Committee Chairpersons. There is no link between the number of housing starts in the month of March to the net asset value of General Motors. There is an emotional expectation that the future price of GM stock will increase if the number of houses being built has increased. Hence, when the Leading Economic Indicators rise, the price of GM stock rises, unless there is another contravening emotional issue that forces that particular price down. Consider also the "market's resistance" to cross certain values (say, 1800 recently) -- purely emotional reactions of the stock buyers. So, when you hear someone speak of the market as a rational entity, you should be thinking "AHA -- Another sucker donating money to MY brokerage account!!!" Rich Strebendt ...!ihnp4!iwsl6!res
ins_aprm@jhunix.UUCP (Paul R Markowitz) (03/21/86)
> >>Someone mentioned that the stock market is just a present value machine > >>This can't be totally true... > >Wrong. The price of a share of stock is the net present value of the > >company divided by the number of shares outstanding... > > Other factors which influence the price of a stock are: > > - The prospects of the company > - The prospects of the economy > - The health of the president (of the United States) > - The adjectives used most recently in news articles about the company > - The opinion of Adam Smith > - The weather > - The phase of the moon > - ... > > Well, that's my opinion, anyway. The expected future earnings of a company are a random variable subject to changes based on "states of nature". Each state of nature occurs with some probability. However, due to uncertainty and various other facts of life, we don't know what those probabilities are. Also, the expected earnings under each state of nature are constantly changing. The present value is the value in current dollars that an investor expects the earnings of the company to be worth. This is a personal decision based on a variety of factors that include all the things (no matter how little they have to do with it) listed above. That means that all those things are part of present value. The stock market is a big present value machine in which investors tell each other what they expect the value of a company to be. Each investor bases his decision to buy or sell based on whether he thinks his view of the information about a company is better than the other investors. -- ------------------------------------------------------------------------ Paul Markowitz "A pessimist is someone who won't call on G-d because he is certain he will get an answering machine." --My sister seismo!umcp-cs!jhunix!ins_aprm bitnet: ins_aprm at jhuvms csnet: ins_aprm@jhunix arpanet: ins_aprm%jhunix.BITNET@wiscvm.ARPA
jwp@uwmacc.UUCP (Jeffrey W Percival) (03/23/86)
In article <2309@jhunix.UUCP> ins_aprm@jhunix.UUCP (Paul R Markowitz) writes: >Each investor bases his decision to buy or sell based on whether he thinks his >view of the information about a company is better than the other investors. Not always. What about the people who buy a stock because they think they can sell it next week for twice the price? No fundamental analysis here. I'm making a pretty obvious and trivial point, but I was just reacting to the people who were, in my opinion, attaching too much logic to the market ("present value machine"). The Dow dropped 40 points yesterday, and the NPV folks would have me believe that a readjustment of the projected earnings stream of the underlying companies caused the market to react downward. I would claim that the market moved in a way that was independent of the valuation of the underlying companies and earnings streams, therefore the market is at best a profoundly defective PV machine. Another way to phrase it: The Dow dropped 40 points yesterday. Will the NPV adherents please name the companies whose earnings projections changed so dramatically between 3:30 and 4:00 EST? -- Jeff Percival ...!uwvax!uwmacc!jwp
jbt@burl.UUCP (jbt) (03/25/86)
In article <2053@uwmacc.UUCP> jwp@uwmacc.UUCP (Jeffrey W Percival) writes: >In article <2309@jhunix.UUCP> ins_aprm@jhunix.UUCP (Paul R Markowitz) writes: >>Each investor bases his decision to buy or sell based on whether he thinks his >>view of the information about a company is better than the other investors. > >Not always. What about the people who buy a stock because they think they >can sell it next week for twice the price? No fundamental analysis here. > >I'm making a pretty obvious and trivial point, but I was just >reacting to the people who were, in my opinion, attaching too much logic >to the market ("present value machine"). The Dow dropped 40 points >yesterday, and the NPV folks would have me believe that a readjustment of >the projected earnings stream of the underlying companies caused the >market to react downward. I would claim that the market moved in a way >that was independent of the valuation of the underlying companies and >earnings streams, therefore the market is at best a profoundly defective >PV machine. > >Another way to phrase it: The Dow dropped 40 points yesterday. Will >the NPV adherents please name the companies whose earnings projections >changed so dramatically between 3:30 and 4:00 EST? >-- > Jeff Percival ...!uwvax!uwmacc!jwp ---------- Just a couple of points: 1- Friday's sharp drop was due to arbitrage selling related to the expiration of stock and stock futures options. It had nothing to do with the value of any stock, perceived or real, present or future. I have heard several experts say that prices recover/return to normal very soon after a sell or buy program is exercised. 2- When we consider the effect of perceived value on the price of stock keep in mind that *the* buyer of stock is a professional-- usually the manager of a retirement fund, manager of a mutual fund or someone of similar training and experience. Thus, it is reasonable to assume that s(he) has full control of emotions! The majority of stock is purchased in blocks of 10,000 or more shares-- probably not triggered by deep emotions. 3- There can be instantaneous events that could easily change the present value of a stock or the entire stock market. Such events might include Paul Volker's resignation, heating up of hostilities in the Middle East that involves us, or a sharp drop in oil prices ;-) Enough, I stop for now. Hope it makes some sense. --------------------------------------- <<I speak only for myself and the thoughts(?) are mine--my wife says so>> Jack B. Turner, Planning Engineer EMSP Project, AT&T Federal Systems Division Burlington, NC Phone - 919/228-4321 (Cornet 291) Usenet- ![ ihnp4 ulysses cbosgd mgnetp ]!burl!jbt -- ---------- <<I speak only for myself and the thoughts(?) are mine--my wife says so>> Jack B. Turner, Planning Engineer EMSP Project, AT&T Federal Systems Division Burlington, NC Phone - 919/228-4321 (Cornet 291) Usenet- ![ ihnp4 ulysses cbosgd mgnetp ]!burl!jbt