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Keynesian beauty contest

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Re: Keynesian beauty contest

#2

Post by lionhearted »

> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value is.

This is true for people who are buying as speculative investors and focused on short term movements in stock price.

However, that's not everyone by a longshot. There are plenty of people who buy for underlying asset value and dividends.

See, for instance -

http://en.wikipedia.org/wiki/Intelligent_Investor

Warren Buffet has said that The Intelligent Investor is the best book on investing ever written.

A fundamental tenet of value investing is that you're buying a small part of a business, not something separate from the business. Keynes is talking about buying stocks to speculative on short term price movements, which is risky and probably a bad strategy for the vast majority of people. But buying a share of a business that's fundamentally solid and priced attractively is rational, even if the business isn't currently popular.

Re: Keynesian beauty contest

#3

Post by rvkennedy »

A key result of this analysis is that there's an element of feedback. If you're the only investor in the world who's using this strategy, it may work. But the larger the proportion of investors who do this, the more locally unstable the market will become. It's a far cry from the "perfect, self-correcting market", which we can think of as the zeroth order long-term behaviour. But feedback effects are not sufficiently local that they cannot have destructive effects over a multi-year timescale.

Re: Keynesian beauty contest

#4

Post by esrauch »

lionhearted wrote: post #2

> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value is. This is true for people who are buying as speculative investors and focused on short term movements in stock price. However, that's not everyone by a longshot. There are plenty of peo…

It seems to me that for companies that pay no dividends (and assuming you would have not nearly enough stock to have a vote that matters) there is no value at all in the stock outside of the stock price. The only relevant metric is what other people are willing to pay to buy your stock. Through some mechanism that I can't undertand, the perception of the stock value is still tied to the performance of the company, so it seems like even people going long are still dealing with their predictions of other peoples valuations.

Re: Keynesian beauty contest

#6

Post by Retric »

esrauch wrote: post #4
lionhearted wrote: post #2

> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value is. This is true for people who are buying as speculative investors and focused on short term movements in stock price. However, that's not everyone by a longshot. There are plenty of peo…

It seems to me that for companies that pay no dividends (and assuming you would have not nearly enough stock to have a vote that matters) there is no value at all in the stock outside of the stock price. The only relevant metric is what other people are willing to pay to buy your stock. Through some mechanism that I can't undertand, the perception of the stock value is still tied to the performance of the company, so…

IMO, the fundamentals are the only really important factor in a long term stock purchasing because the rest is mostly just paperwork.

Companies can start to pay dividends even if they have avoided them for a vary long period of time. EX: Microsoft

Companies can also be bought out and have their total stock price + a small premium paid out to their investors.

And finally rather than pay a dividend a stock buy back program can accomplish the same net result with significant tax advantages.

Re: Keynesian beauty contest

#7

Post by lotharbot »

esrauch wrote: post #4
lionhearted wrote: post #2

> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value is. This is true for people who are buying as speculative investors and focused on short term movements in stock price. However, that's not everyone by a longshot. There are plenty of peo…

It seems to me that for companies that pay no dividends (and assuming you would have not nearly enough stock to have a vote that matters) there is no value at all in the stock outside of the stock price. The only relevant metric is what other people are willing to pay to buy your stock. Through some mechanism that I can't undertand, the perception of the stock value is still tied to the performance of the company, so…

> for companies that pay no dividends ... there is no value at all in the stock outside of the stock price [but] the perception of the stock value is still tied to the performance of the company

Owning a stock is like owning a fraction of a company. The value of stock comes from the following:

(1) dividends (that is, a fraction of current profits)

(2) assets (that is, a fraction of stuff the company has that could be sold; one of Warren Buffett's strategies is to buy companies that have more assets than their total stock price, such that merely liquidating the company would turn a profit.)

(3) estimated future dividends (a company may not presently be paying dividends, but may be on a clear trajectory to profitability and therefore future dividends)

(4) estimated future assets ("growth" type stocks are in companies that are investing profits in assets rather than paying out dividends. This has certain tax advantages over dividend-paying stocks.)

(5) estimated future valuations (that is, guesses as to what others might pay for the stock later)

Notice that only one of these involves perceptions of others' valuations. The rest are a matter of company performance.

Re: Keynesian beauty contest

#9

Post by awaz »

That explains the recent LinkedIn IPO prices, people trying to guess how much the 'average' people value LinkedIn rather than how much you value it (or the value based on certain indicators)
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