Free market solution to insider trading?

[M1ThinkTank]

I agree that things have intrinsic value in the sense that you agree that pigs could get to the moon. Glad we’re in agreement.

Z.

Appeal to ridicule. Nice argument.

Instead of accepting a perfectly reasonable, logical assumption, you make some comment about pigs in order to give yourself some feeling of intellectual superiority.

I’m willing to bet that the entire Austrian dogma is based on countless assumptions.

However, like in politics, its only OK as long as the other guy isn’t doing it.

[billetright]

How is insider trading a problem that anyone would need and/or want to find a solution to?

How is interference with another person’s business operations going to be enforcing a condition for a free market?

The term “free market”…a world of words…

[Bill_Smith]

What Does Intrinsic Value Mean?

1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value. Investopedia.

You can accept this definition or not. Rational people will.

Manhattan Island was worth in terms of both tangible and intangible factors worth a couple of furs and some trinkets according to the Indians that sold it. Today it’s worth trillions. Tomorrow after a nuclear holocaust it may be worth some furs and trinkets.You can’t predict the future. Intrinsic value is not set in stone. It is set by the market. And Mr Market can be one irrational SOB

[JackCuyler]

LAST TIME: Intrinsic value is the value of a stock if all future cash flows from that stock were certain and known.

That flatly contradicts the general definition of “intinsic value” but for the purposes of this argument, I’ll accept it. I think the definition thing is what most people are aguing, however. Since the future is never certain, however, this does back up the claim that there is no such things as intrinsic value.

[Bill_Smith]

There is such a thing a intrinsic value. It only applies to the present market. Ant attempt to apply it to future markets is futile. Future markets will dictate intrinsic value whether you like it or not.

[Autolykos]

@M1ThinkTank

I understand that value is subjective. I also understand that a share of stock has intrinsic value. It has intrinsic value based on the company’s ability to make money. If you were Nostradamus, and you could accurately predict a company’s future cash flows, you would know that company’s intrinsic value. Investors are not Nostradamus, but they try to be. As a result, when material information is made public, stock prices can shift dramatically in one direction or another because investor perceptions about intrinsic value change dramatically.

With all due respect, you might have well said “I understand that value is subjective. I also understand that value is objective.” In other words, you inherently contradicted yourself. How will you resolve this contradiction?

You claim that a share of stock “has intrinsic value based on the company’s ability to make money”. How can anyone measure or calculate a company’s “ability to make money”? While I understand your hypothetical about being Nostradamus (i.e. clairvoyancy), it has no applicability in the real world, as the future is inherently uncertain. Hence, as others have already pointed out, intrinsic value does not exist and cannot exist. All we’re left with is subjective value, which you yourself admit when you talk about “investor perceptions”.

Now having said that, no one’s denying that stock prices can shift dramatically as investors gain new information (what you might call “material information [being] made public”). What we are saying is that, if stock prices do shift dramatically as a result of new information, so what? Caveat emptor.

@M1ThinkTank

In short, intrinsic value is legitimate, since it is what investors are trying to estimate. They predict future cash flows, discount them according to a required rate of return, and hope that their assessment of intrinsic value is correct.

I understand what you’re saying, but I think you’d be better served (at least around here) if you use a different term from “intrinsic value” to describe it. A lot of people (myself included) are getting hung up over the term “intrinsic”, which we take to mean “inherent”. We would dispute the notion that a given company has any inherent profitability.

@M1ThinkTank

Thank you for stating the obvious. As for your first sentence, it is wrong in the case of insiders. If they could trade freely on nonpublic information, then they would almost always be entitled to much better prices for their stock than the average investor.

There’s no need to get snarky. I wasn’t trying to insult your intelligence.

We seem to be using different definitions for “entitled”. As far as I can tell, you’re defining it in the sense of “will receive”, whereas I’m defining it in the sense of “is obligated to receive”. I’m sure you see the difference. My point is, no one is ever obligated to receive a particular amount of money for something he owns.

@M1ThinkTank

Again, thank you for stating the obvious. I already stated way earlier in the thread that this was true. But you neglect to mention that supply and demand is greatly impacted by the release of material information about a company. When nonpublic material information about heavy losses is used when an insider sells stock, he is selling when demand is based on public information. When that nonpublic material information is made public, all other investors must sell when supply and demand is based on the new information. In other words, they take a loss, the insider takes a profit (or mitigates losses).

You seem to act as though you believe my “negligence” was deliberate. Why is that? I can assure you that it wasn’t.

Anyways, of course there’s the question of what exactly constitutes “public information”. Do you have a systematic answer here?

Still, your words here have helped me to understand your position better, and I thank you for that. It seems that you’re treating the case of insider trading as a case of fraud. The insider sells his stock to one or more buyers who don’t know what he knows. You’re saying that, if the stock price subsequently tumbles, the buyers have effectively been sold “lemon stock”. Am I right?

What about the reverse case? Someone with insider knowledge believes (based on that knowledge) that the company’s stock price will go way up in the future. He buys stock from one or more sellers who don’t have that knowledge. The stock price subsequently soars. Did the sellers get cheated out of capital gains by the buyer?

Either way, I think there are two important things to remember here. One is that investing in a company by buying stock in it always carries a risk of “losing money”, i.e. not being able to recover one’s investment (if not more). Another is that, following caveat emptor, it’s the buyer’s responsibility to make sure, to the best of his ability, that what he’s buying is the same as what he believes he’s buying. I wouldn’t call this “intrinsic value”, but I can see why you would.

Returning to the insider-trading scenario, if the insider wanted to unload his stock on someone, and the would-be buyer asked him whether he had any inside knowledge about the company, the insider would certainly be defrauding him if he told him no. Maybe this is a “free-market solution to insider trading” itself.

@M1ThinkTank

In effect, insiders can make trades ahead of predictable shifts in supply and demand for a profit. (the shifts are only predictable to them, not to outsiders)

What do you mean by “predictable shifts”, exactly?

@M1ThinkTank

Apples to oranges. In one case, someone is using negotiating skill to get a better deal. In the other case, someone is using nonpublic info to get a better deal. It has nothing to do with their investing acumen, just their access to information.

You didn’t answer my first question. Let me ask it again: does it make sense to say, when no one is willing to buy what you want to sell at the price you want for it, that you’re being taken advantage of?

Successful haggling is investing acumen. One is investing in a good or service. Perhaps the haggler was able to haggle in the past, so he “knows” that it can be done. The non-haggler doesn’t have this “knowledge”.

There’s also the question of what exactly constitutes “information”. For example, a company can be completely honest about its financial information, but present it in a way that makes it difficult to put everything together. Investors with greater investing acumen would, presumably, be better at connecting the dots. Yet they had the same access to information as everyone else. What then?

[Eugene]

I didn’t read the entire thread, so maybe I am repeating something someone has already said. But I don’t understand why do we even have this discussion. Some companies might choose one model and some companies will choose another model. The contracts between the shareholders and the CEOs will be different in each model. Why should the government be in any way involved here? After all its just a private contract between individuals.