Supply and Demand are the only two forces in an open market. Truth is the only valuation is only how much someone else is willing to pay. The easiest example it an old family heir loom, worthless to anyone but your family, priceless to your family.
Lets talk about now a days stock prices, I reference company ABC who has one single stock holder, you. You run into some issues and HAVE to sell the stock tomorrow. Price you paid for it was 25 dollars. I am your only buyer, while the stock may be "worth" $50 by price to book, PE ect. I am only willing to pay your $10 being your only buyer you must take the price. SO, where did that $15 go? The company doesn't have it. . . you don't have it. In theory I now have it because I supposedly bought a $50 stock for $10 but then when I want to sell and once again there are no buyers stock becomes worthless EVEN if the company is kicking butt, making good money and has a great product if there is no one to buy my share it is considered worthless.
Hence the bigger sucker theory!
Tuesday, January 27, 2009
The Market Facts
So here is how I see it. . .
The price to book is the only real statistic that can possibly be used when valuing a posisition. Worst case is untill we have truth in our accounting even that number can potentially be miscontrued to be fictitious.
I'll give you an example, a CEO of a company gets incredeble benefits for increasing revenues and the value of the company. One way they can do that is if they assume they will sell everything in their ware house at a certain cost regardless of demand.
Like a 2nd grader, who sells lemonade at the stand he figures if he sells 500 cups he would have enough money to buy his new bike! So what does he do, he gets enough cups and supplies to sell 500 cups assuming that by the end of the day he will have enough money for his new bike.
This is precicly what the CEO is doing only with the knowledge that he will not sell 500 units in one day but he makes enough and books them as though they will sell in one day and boom he has turned the company around, gets a HUGE bonus and moves on to leave the next CEO to try to sell all these unwanted excess product.
Thus the price to book is a figment of their accounts imagination, and that stock price you are paying is a figment of YOUR imagination.
The price to book is the only real statistic that can possibly be used when valuing a posisition. Worst case is untill we have truth in our accounting even that number can potentially be miscontrued to be fictitious.
I'll give you an example, a CEO of a company gets incredeble benefits for increasing revenues and the value of the company. One way they can do that is if they assume they will sell everything in their ware house at a certain cost regardless of demand.
Like a 2nd grader, who sells lemonade at the stand he figures if he sells 500 cups he would have enough money to buy his new bike! So what does he do, he gets enough cups and supplies to sell 500 cups assuming that by the end of the day he will have enough money for his new bike.
This is precicly what the CEO is doing only with the knowledge that he will not sell 500 units in one day but he makes enough and books them as though they will sell in one day and boom he has turned the company around, gets a HUGE bonus and moves on to leave the next CEO to try to sell all these unwanted excess product.
Thus the price to book is a figment of their accounts imagination, and that stock price you are paying is a figment of YOUR imagination.
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