What point are you making? I’ve said several times that the average investor can only speculate on insider transactions, while insiders can make trades based on actual, material information.
Explain to me how the situation I described is fair to all investors. Additionally, explain to me how higher costs of capital would be beneficial to an economy. Finally, please explain to me how in an economy that uses gold as money (which is what you all dream of), it would be best if a select few could make excess profits at the expense of many.
Sounds like tyranny to me.
There is no such thing as intrinsic value, so trying to estimate it is a complete waste of time.
You do not understand subjective value theory, and certainly not praxeology if you think that people could know a price based on perfect information.
You don’t understand basic time-value of money concepts if you don’t understand how having perfect information would affect the price of a stock.
I asked you to back up your claim. Why shouldn’t he? Explain how what he is doing is wrong and why or retract your statement.
I don’t have to back up a claim, because I didn’t make one. Shifting the burden of proof to me is poor argumentation.
What is the value of time?
“In fact, if you had actually read the thread, the debate is about whether or not insider trading should be legal. So the real question is, should Insider Joe be able to buy tons of shares from Average Investor Bob at a discount because Joe knows the company is about to buy some prime commercial real estate?”
Hell, that’s even worse. Now you’re saying the argument is about whether or not Billy Enterprise should be ALLOWED to lease land for his restaurant simply because of certain thoughts in his head. That isn’t eerie at all.
Seriously, break it down to a transaction. If I go to a thrift store and see something that is worth a cool grand being sold for five dollars, what makes me the bad guy for picking it up and selling it on eBay? I mean, the first assumption in what you are saying is that the person buying the stocks has enough faith in the investment the company is going to make that he is willing to bet on an increasing value in the holdings. And look at it the other way around. If it is only morally sound that those who do not have inside information are able to profit from the purchase of stocks, first and foremost are we to then investigate everyone who makes a good investment? What if they have a room with newspaper clippings and footage of executives they’ve been stalking and listening in on, trying to get a good lead?
I’ve backed up my claim a million times in this thread. I’m not going ot redo it for you. If you want to argue against my premises, I’ll do that.
I’m not going to explain rudimentary financial concepts to you. There are countless resources available.
I never said anything about Billy Enterprise not being allowed to lease land for his restaurant.
As for the thrift store, again, apples to oranges. I’ve explained several times why this is so.
And no, we don’t investigate everyone. Even if we did, newspaper clippings = public information. As for following around executives to steal information, that is currently illegal. However, it is unlikely that, unless you are an insider (a high ranking employee), that you will be able to discover any material information because you will not be close enough to the executives when they are actually discussing it. They’re not going to be discussing sensitive corporate material at Outback Steakhouse.
Company A decides to acquire company B. Company A hires an outside company to handle the paperwork involved in the acquisition. A lawyer or an accountant for this outside company tells his brother in law about the impending acquisition. His brother in law buys all the stock he can in company B, maybe he tells a few friends who tell a few friends. Soon company B’s stock soars forcing company A to pay a much higher premium for the acquisition. Maybe company A backs out. Of course brother in law is privy to this information so he liquidates his stake at a premium. Maybe company A goes ahead with the M&A and brother in law and all the other stock holders of company B are rewarded. The question is. Is this a fraud or some other criminal activity? Yes. Company A didn’t get big enough to acquire company B by being stupid. They would have made the third party company sign a non disclosure agreement. The big question is. Do we need the SEC or FBI to enforce or investigate these civil matters? Under our present system,Yes.In a system void of government intervention Company A would still have to hire a Private Investigating firm to fill this role.
They can buy all the stock that they want in Company B, but it wouldn’t really affect the acquisition. Acquiring a company by buying shares on the open market is usually a last ditch effort in a hostile takeover. Generally, Company A is going to offer a price per share, based on how much they believe the future cash flows of Company B will be. They don’t care what the market price of the stock is. They will make an offer, and the shareholders can either take it or leave it.
If the people you described buy the majority of the shares and reject the acquisition bid, they will be the ones holding all the stock when the acquiring company moves on. If the stock price was inflated based on news of the acquisition, bad news for them.
They can buy all the stock that they want in Company B, but it wouldn’t really affect the acquisition. Acquiring a company by buying shares on the open market is usually a last ditch effort in a hostile takeover. Generally, Company A is going to offer a price per share, based on how much they believe the future cash flows of Company B will be. They don’t care what the market price of the stock is. They will make an offer, and the shareholders can either take it or leave it
The shareholders aren’t about to accept an offer lower than the market price of their stock. You’re right Company A will submit an offer to purchase but no one will take it seriously if they can sell their shares on the open market for more.
How does one measure the intrinsic value of a stock? Isn’t the method of measurement subjective?
I believe if you understood subjective value theory and the implications of it, you would change your mind about the concept of intrinsic value.
Any asset is worth only what the highest bidder is willing to pay. You can study charts and pe ratios till you get brain freeze. Mr Market sets the price and he can be one irrational SOB. At one time the ground under the Imperial Palace in Japan was worth more than the entire state of California. Of course if Fanny or Freddie had it on their books it would still be worth that much since they trashed Mark to Market accounting.
You made the case that investors could make a profit by bidding up the price of a stock in anticipation of a takeover, essentially adding a “merger speculation premium” to the price of the stock. I made the point that Company A won’t pay this premium, so the investors that bid up the price above Company A’s offer will lose.
The fact is, if there is a premium built into the stock price based on speculation about the merger, then all stockholders will not be able to sell their shares at a price above the bid price. No one will buy the stock from them at the inflated price if a potential acquirer is offering less for the company. This is even moreso since the inflated price is based on the cash flows expected from the acquisition, not the cash flows expected from the company itself.
Yes, the measurement is subjective, but intrinsic value is not. Investors try to estimate intrinsic value, which is the price that a stock would trade for if you knew everything about the stock’s future cash flows. There is no disputing this, no matter how many times the broken record of ‘subjective value theory’ is played.
As an example, imagine two stocks for which we have perfect information about all future cash flows (we know their intrinsic values). Stock X will pay owners $10/share in dividends for eternity, the Stock Y will pay $5/share in divfidends for eternity. If average investors wanted a 10% ROI, they would pay $100 for Stock X and $50 for Stock Y. To pay more for either would be stupid.
If average investors owned both stocks, and Stock X was trading for $120 while Stock Y was trading for $40, then they would sell X to buy more of Y. This is because X is only earning 8.33% per share while Y is earning 12.5% per share. Buying and selling would occur until both stocks were earning the same ROI. Who would willingly hold a stock that is earning less in a case where all future cash flows are known and certain?
@Joe, it is like talking to a wall. He is bound and determined to cling to his logical errors.
Point them out.
I’m asking you to defend this concept of intrinsic value. Not to assert it’s existence. Can’t I just as easily say that the intrinsic value of a stock is $1000? What would make me wrong, and others right?
I understand your example. It doesn’t describe what intrinsic value is. It doesn’t even address it.
Do you not see that there is no such thing as “intrinsic value”, but rather a plethora of subjective valuations that determine the market price? On the whole, investors aren’t trying to “measure the intrinsic value” as a final ends. In the grand scheme of things they are trying to maximize their own profit. Maybe some try to measure what they believe is intrinsic value as a strategy. They’re chasing a ghost.
What bothers me here is that you claim that all activity on the stock market is based on people and institutions trying to find the intrinsic value of a stock. All it takes is one person who isn’t looking for the intrinsic value of a stock to destroy your argument. I’m pretty sure people have traded based on criteria other than what you have proposed. Are people who use the elliot wave trying to find intrinsic value? How about algo traders or HFTs? I don’t think that they are trying to trade based on some kind of intrinsic value. I think the majority of market participants are trading based on the belief that their strategy will be profitable overall, and that it has nothing to do with the notion intrinsic value. Some of those strategies include anticipating the moves of other buyers and sellers in the market.
Now, there may be some investors such as the ones you describe. I won’t deny that. I don’t see why they should be the ones who are catered to.