The market has an upward bias because it is made up of companies that create things and add value. As an example, I'm an entrepreneur. I started a company and own all the stock. The day after I started the company I had one client and a small revenue base, so my stock wasn't worth much. I grew the company into a much larger entity earning a lot more money doing something that hadn't been done before that created value for my customers. Now a few years later my stock, in this case my company, is worth a lot more, in terms of absolute dollars because I created something real of value. The upward bias of the market is not smoke and mirrors, even though the current value at any given time may be. The corallary to this is that commodities don't have a directional bias because they just are, unlike a growing value producing company.
Trading - An Escher Paradox
- Thread starter wildflower
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Once a company goes public, the use of the stock market to it is almost nil. They can do secondary offerings, and they can raise money through debt, but those things are few and far between.
Companies go public not because there is some sort of social reward to main street, "value". They go public for the founders and VCs to cash out and take the money and run.
After that it is all greater fool theory.
Companies go public not because there is some sort of social reward to main street, "value". They go public for the founders and VCs to cash out and take the money and run.
After that it is all greater fool theory.
When people say companies need Wall Street, what they really mean is those peope whose compensation is tied to share price, or the top management. The rest of it's employees Wall Street is meaningless.
Public company investing is a stupid, rigged game. But Snapchat should wise up and play along.
On Thursday, the company turned in its second earnings report card since its much hyped IPO. It did not go well. Revenue and the number of new users rose less than expected. A measure of revenue that Snapchat generates from each user was flat compared with the figure in the fourth quarter of 2016. Parent company Snap Inc. should be doing better by now in generating sales.
Combined with the unpleasant surprise Snapchat also dumped on investors three months ago, the second-quarter figures are sure to make investors who had alreadyturned against Snapchat sour even more.
ETC
https://www.bloomberg.com/gadfly/ar...t-needs-to-play-the-wall-street-game-it-hates
Public company investing is a stupid, rigged game. But Snapchat should wise up and play along.
On Thursday, the company turned in its second earnings report card since its much hyped IPO. It did not go well. Revenue and the number of new users rose less than expected. A measure of revenue that Snapchat generates from each user was flat compared with the figure in the fourth quarter of 2016. Parent company Snap Inc. should be doing better by now in generating sales.
Combined with the unpleasant surprise Snapchat also dumped on investors three months ago, the second-quarter figures are sure to make investors who had alreadyturned against Snapchat sour even more.
ETC
https://www.bloomberg.com/gadfly/ar...t-needs-to-play-the-wall-street-game-it-hates
This seems like squaring the circle, if you believe the pseudo-science that free markets price to equilibrium based on supply/demand.
In fact, what it seems like to me that in commodities, it is not the supply side that matters, it is the demand side that drives prices, down! Yet every Wednesday, everyone hangs on the inventory numbers.
You can argue that the price of oil should be both $10 a barrel, and $200 a barrel. It is all very confusing.
Supply and demand move in tandem. Without one there is no other. Inventory numbers reflect both supply and demand... when it's viewed in relation to other factors.
Inventory up could mean less demand > price drops. Or it means oversupply > price drops. Or, it could mean suppliers are gearing up for bigger demand... like when you have a big book of orders and you are filling your warehouse up to ship out... that's demand driven > price up.
Oil prices are not really set according to a free market. It's basically run by a cartel, creating a monopoly like situation, or oligopoly... pricing power initially lies with the suppliers (OPEC).
But IMO, generally speaking it's demand that drives prices. No demand, no product. Although it is possible that more demand can be created by a supplier, but that has more to do with marketing... eventually, if there's no demand there will be no incentives to create a product.
That's one of the failures of a Communistic economy. An overseeing authority as big as a government will be so slow and out of touch that they can't shift gears quick enough to adapt to changing factors in demand, creating oversupply in certain areas and undersupply in others... which is destroying capital, human and financial.
Technically you're correct.. but for everyone else, the financial markets are a way to earn money on capital.
If @Sig's company has higher free cashflows and higher earnings than yours, people will rather buy his stock than yours, pushing his stock price up. He is creating more value with his company for shareholders than you...
There's no smoke and mirrors really.
Stocks like SNAP and other tech/biotech etc firms, they probably have a very high valuation compared to current earnings. But most people invested in them expect significant value creation in high earnings with the market share they have or are going to get in the near future.
If they don't end up creating earnings, or more market share so a bigger possibility of higher earnings, than the stock should drop. That's more or less what happened with the internet-bubble. People piled into it, but lots of companies couldn't live up to promises... and collapsed.
For every SNAP there is a SHOP. It is up to us to figure out which one to invest/trade.
In general, some of your points are valid but there are good counterpoints too.
Even if the company does not need a secondary offerings and borrow long term, it still needs credit facility for daily operation and the stock price is a validation for the banks to lend money (been there done that). It is more difficult and often more expensive for a private company to find credit (been there done that too).
Furthermore, owners can monetize their shares easily so it provides liquidity to founders and early investors and gives others like me a chance to participate in the growth and profits.
If I might suggest a couple other ways you might look at it.
1. Companies do grow and create value. Google sold their stock at IPO for $23B. They earned $19B over the last 4 quarters. It's hard to say it's some kind of greater fool game when the company now earns nearly as much each year as the founders and early investors got for selling it. For sure some companies IPO for insane valuations that are never realized. That doesn't make the entire public company concept invalid.
2. Going back to my little company, it's profitable and I would earn a certain amount if I held it for the next X years. I could also sell it or IPO for a little less (the NPV) now, trading away the risk adjusted returns in exchange for money now. That in no way makes the buyers fools, they're simply getting my future cash flows at a discount that reflects their risk. At the same time they get 100% of the future upside, and I no longer do.
3. I took tremendous risks starting my first company, risks that actually exceeded my expected risk adjusted return even if you factor in the small chance the company was a Google. I only did that because I had the right half of the bell curve of returns in an IPO to add to my expected value. I had an investor who definitely only invested because of the potential for that right side of the bell curve, like every venture investor. So yes, if you buy at an IPO the founders and venture investors in that specific company are getting a spectacular return. Throw that in with the thousands of failed startups, not so much. You can't expect to pay Round 1 prices as an IPO investor to the guys who have carried all the risk to that point. If you do, the entire startup ecosystem disappears because no-one starts or funds a startup company if their upside is limited and the high probability downside is not.
4. A good chunk of the IPO cash goes onto the company's balance sheet, which you as the IPO shareholder own.
I get your cynacism, I'm a cynic myself. But this is one area I'd submit it isn't really warranted.
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Yes, but think about what this means. Imagine the cost of a barrel of oil in 1910. Back then it was plentiful in terms of reserves. The key is that people couldn't extract it, and there was "no market use" for it. And yet, adjusted for inflation it would have cost in todays dollars like $5000 a barrel. Today, by fiat money, it is worth comparatively far less. And yet, there is way less of it in the ground, but far more of it above ground.
This seems like squaring the circle, if you believe the pseudo-science that free markets price to equilibrium based on supply/demand.
In fact, what it seems like to me that in commodities, it is not the supply side that matters, it is the demand side that drives prices, down! Yet every Wednesday, everyone hangs on the inventory numbers.
You can argue that the price of oil should be both $10 a barrel, and $200 a barrel. It is all very confusing.
No you can't compare apples with oranges. When you compare values in economics, you can only compare ONE condition at a time with everything else held equal. When you are comparing the price of oil from the past to today, you are comparing two things all at once, supply/demand and inflationary effect and that's not right. Supply/Demand and inflationary effect are two different economic phenomenons that shape prices differently.
You can only compare ONE thing at a time, Supply/Demand from the past vs. today in gold standard OR in fiat money, and then assuming the same Supply/Demand from the past and today, compare its value in gold standard and in fiat money. Then you can look at how each of the conditions affect the price and how much and etc. and everything would be more clear.