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Comment by maneesh | Hacker News Reader

The writer makes a few good points -- I liked his quoted selection "Faced with extreme valuations, the first impulse of investors..."

However, I think there is a fundamental flaw in his analysis -- specifically when he makes this a majority foundation of his point:

"Every security is an asset to the holder, and an equivalent liability to the issuer."

That's not true right? A few moments reflection makes me think of stocks -- which are equity, not a asset nor liability. [1]

What do you guys think? That point seemed to be a big part of his analysis, right?

[1] https://www.quora.com/What-makes-a-common-stock-an-asset-or-...

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Companies issue shares. These shares are listed as a liability on the company's balance sheet. Each share represents a liability to the company because it entitle its holder to a share of any dividends paid by the company.

The intrinsic value of a share is the net present value of this future stream of dividend payments, not its current market price. OP's point is that the market price of a share can be significantly above its intrinsic value in periods of irrational exuberance, such as now, creating "paper wealth" that doesn't really exist and which will evaporate when the speculators head for the exit.

The present value of future dividends is highly dependent on the terminal state of the company, and the future of the economy. So I don't find wild fluctuations in stock prices to be proof that the market is inefficient or over/undervalued because the far future is very uncertain.

Every stock chart is an invitation to assume false precision, because unlike a scientific measurement there is no explicit +/- range. But the true value must have a range of uncertainty, and it can easily be many orders of magnitude.

Also, every time I see the phrase "irrational exuberance" I am reminded that while there was a bubble in the late 90s, at the time Greenspan famously was worrying about the market in public, the Dow was around 5,000 or so IIRC, a long time before the peak.

Wait till you see how much more money is in the world's money supply since 2001, thanks to derivatives [1].

[1] https://pavlok.com/moneysupply

He’s just saying it’s an IOU, I think.

but shares aren't an IOU. They are points that represent a company, and can be traded at a later date dependent on the market. They can't just redeem it for a promised cash amount at a later date -- they are tradeable at what someone else is willing to buy -- with no guarantee that someone else will be willing to buy...

I disagree, somewhat.

Shares are an "I owe you dividends, if and when" and they also represent voting control that a buyer could use to extract value from the company. Those both mean the holder of the paper is owed something even if it's much more vague than a bond.

I guess there are stocks these days that have neither dividends nor votes, though. That seems like a scam though.

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