Originally Posted by
mistaTea
I think we would all be better off if the stock market closed for a while and we never received minute by minute quotes on the business.
But I do think you are stretching here a bit. Remember, I am not a proponent of EMT - at no point have I said that the market is always efficient and the stock price is the stock price, no additional thought needed as there are no opportunities.
Clearly that is not true at all.
All I have said is that it is my view that the market as a whole is reasonably efficient most of the time. Most of the time (not all of the time) if you look up a stock and see how its stock price has been tracking over the last wee while, it often gives a decent enough approximation of what the company is probably worth. Within cooee anyway.
Now if you are looking at a company where the chart is spiking up and down massively in short periods of time, I don't think anybody would be able to take anything intelligent away from that in terms of value.
But if you look at a company like KO, for example, the market valuation over the last few years probably is reasonably accurate. A few ups and downs, and the market cap is currently sitting at around $260B.
Well, I think it is likely that this is an indication of what KO is worth and the business probably is worth somewhere between $225 - $275B. It would be a big surprise if I dug into the financials to discover that actually KO is worth $500B and the morons who analyse the stock for the large investment firms have missed a trick! Or that actually KO is only worth $100B and these muppets are overpaying massively.
There will be other examples, as I say, where the SP is all over the place and nobody would claim any level of efficiency. Perhaps there is more opportunity to make money there if you are prepared to do the work.
I do think it is a good idea to understand why the market has set a given value though. Even if you are convinved the value set is wrong, I think it can help the analysis as it might help you focus on a perceived threat (for example) and ensure you have rounded out your due dilligence. You don't believe that is necessary and I accept that.
But your point about being in the dark if the business was private and we didn't have "Mr Market" to educate us every mintute about what our business is worth...
I take your point, but would just caution not to conflate too many issues.
Owning the business privately is the equivalent of being on The Board of a listed company (not a two bit Joe Schmoe shareholder). The reason is that in both instances you would have access to all of the insider information, and you would make your decisions on what to do with the business based on your cashflow, competitor threats, opportunites, market conditions etc.
The only difference is that with a listed company, thousands of men and women scrutinise the decisions the board make in the context of the overall market conditions, opportunities, threats etc and then set a price for the business in real time based on those expectations. For the long term investor, the constant updates for quoted value is of little value, as there is no intention to sell ever (unless something changes in the business that is undesirable - but not because of changes to quoted value).
In the private business scenario you obviously don't have that. You make your plans and then will track the progress and get a sense of whether your business is increasing or decreasing in value based on how well your strategy is executed and whether it is achieving the desired results. You won't be thinking about the likely value of your business every day, but you will think about it. And when the day comes to sell, all of those decisions you made ultimately do get scrutinises by "Mr Market" who ultimately sets the price. There is no escaping him.
In the end, I am not even sure that we actally disagree hugely. We both do not believe in EMT (in the theoretical purist sense)... but where we may differ is my view that most of the time the stock price is a reasonable approximation of the value of most businesses. Perhaps you believe that most of the time the stock price is divorced from the reality of underlying intrinsic value.
Or perhaps we are both half right :cool:
Either way, we both like to invest with long time horizons and consolidate into a small number of businesses. Provided we refrain from being too active, I am sure we will both come out just fine regardless of any differences of how we view the market and its role (if any) in establishing the value of a business (or any other asset for that matter).