Yes we do, that's literally what a marketcap is. People who are sure it isn't correct can beat against it and profit in the correction.
I mean in theory. In practice:
- You have to use a very specialised definition of "we". Specifically, it's what people think, weighted by how much money they control. So wealthy people have an outsized say in market cap. Controllers of hedge funds, pension funds, etc an even more outsized say.
- People's pricing can be based on how they expect other people to price the stock in the future rather than how much they think it is truly worth based on the fundamentals of the business. If someone's price is based on this, then it is no longer a reflection of how much they think it's worth.
1) I'm confident that in the long term, company X will grow in value. I invest $1000 and will wait however long it will take, 10 or more years. I risk these $1000 only, but can earn multiple of it.
2) I'm confident that in the long term, company Y will decrease in value. I can short it with $1000, however either I risk much more than $1000 or I can't set the timeframe (because of forced liquidation). I also can't earn more than $1000. In the long term, I'm also exposed to inflation. Effectively, it's possible to short only in a short timescale, which is super risky.
The two betting options are very asymmetric, which IMHO favors overvaluation of certain hyped stocks, since there's no reasonable (not extremely risky) way to bet against them.
the market can stay crazy lobger than you can stay solvent.
You losses in shorting are unlimited. Every i vestor from Warren Buffet to my dog strongly advises against shorting
Buy puts.
> Every i vestor from Warren Buffet to my dog strongly advises against shorting
If you are not sophisticated enough to take a short position, you are probably not sophisticated enough to buy a specific equity. This is true of essentially everyone who does not invest professionally, including myself.
When you discover the second variable, you might also discover that Tesla’s ‘Equity Market Cap’ makes a lot more sense vis a vis the other top auto manufacturers based on the scale of that other variable in the valuation equation for those other companies.
The house analogy is a helpful one. Let's say I buy a million dollar house but I only have $100K of equity in it so far. My market cap is $100K and my debt is $900K. I'd argue that the house is still worth a million dollars.
This is important here since Tesla has much less debt vs. the rest of the auto industry.
Your house analogy and the way you explained it does not make sense to me. Since market cap is what the market is saying a company is worth, it isn’t right to equate that to the “$100k of equity” in your example house. It’s more correct to equate it to the $1 million value the house has.
Right now GM has an enterprise value of $130B. That means it's expected to spit out $130B of cash over its lifetime (discounted to a present day value). But the market cap is only $50B. Meaning $80B of that future cash will go to GM's lenders.
It of course feels super counter-intuitive to add debt (which feels like it should be a negative) to the valuation. But I always felt the house analogy gives an intuitive everyday example.