> >|> Tobias in his "The only investment guide you ever want (or something
> >|> close to this title)" :
> >|>
> >|> Value (worth) of a stock is what the buyers are willing to pay
> >|> for it.
> >|>
> >|> What a buyer wants to pay is what the buyer things the stock is worth.
> >|>
> >|> This circular definition is inherent to the way valuation of a stock
> >|> is done. This is not just true for stock valuation. Similar circular
> >|> concepts are inherent in the valuation of real estate, collectibles etc.
> >|> May I extend this to say that whereever there are Supply and Demand
> >|> forces are acting to set the price of anything, circularity is inevitable?
> >
> >I disagree strongly. Stock has an intrinsic value based on either its value as ownership in a company (and therefore its value if the company is sold, and the value is realized), or as the source of an on-going and increasing stream of dividends.
> >
> I agree 100% if your definition of value is the present value of a
> dicounted future stream of dividends. But the circularity inherent in the
> definition of value (or worth) is seen in the following example. If someone
> tells you that he bought a tulip for $1200, you will laugh at him. But if
> you saw a tulip in a shop yesterday for $2095, you will even tell him,
> "Hey, you got a bargain on that tulip.". The tulip example, though sounds
> academic, did actually take place in 18th century Holland (during the
> tulip mania and after the tulip crash the "value" of tulip dropped from
> 1200 to 100 or so.)
>
I don't know where I got the following data -- it was posted
by someone to this group a while ago. Just thought I'd show
it, as long as the tulip example is being used.
The bull market in tulips began in 1634 (17th century, incidently)
and lasted 36 months. Tulips went up 5900%, i.e., an annual
return of 290%. After three years a 10 month bear market took
over, causing prices to decline 93%. Note that you still had
more money after this boom/bust cycle than at the start.
The same thing cannot be said of the boom/bust in Mississippi
shares in 1719. A 13 month bull market ran the prices up 6200%
(4500% annual return), then a 13 month bear market knocked off
99% of the value, leaving you with something like 60 cents on the
dollar.
Shag
--
Rob Unverzagt |
shag@aerospace.aero.org | The will to a system is a lack of integrity.
unverzagt@courier2.aero.org | - Friedrich Nietzsche
