Re: Stock market is a present value machine

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1 total messages Started by SETH JACKSON 297-4751 Mon, 24 Mar 1986 14:24

#1141

Author: SETH JACKSON 297-4751
Date: Mon, 24 Mar 1986 14:24

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>> 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.

I'm afraid that you're the one who's WRONG WRONG WRONG. It seems as though
you misunderstand the meaning of the term "present value". Present value
is the value of the EXPECTED future earnings of the firm, discounted by
a percentage that reflects the PERCEIVED amount of risk. The price of
the stock is always a function of the net present value of the firm.
Since emotions have an effect on perceptions, this is perfectly consistent
with stock prices being set by emotion.
--
					Seth Jackson

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