The Big Picture

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The Number

Monday, April 19, 2004 | 06:04 AM

A hedge fund manager friend pointed me to this post from Mark Cuban's blog. Its his forward to the book "The Number," by Alex Berenson, a top financial investigative reporter for The New York Times:

"If the value of a stock is what people will pay for it, then Broadcast.com was fairly valued. We were able to work with Morgan Stanley to create volume around the stock. Volume creates demand. Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers.

Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how profits are calculated is manipulated to give confidence to buyers.

I get asked every day to invest in private companies. I always ask the same couple questions. How soon till I get my money back, and how much cash can I make from the investment? I never ask what the PE ratio will be, what the Price to Sales ratio will be. Most private investors are the same way. Heck, in Junior Achievement we were taught to return money to our investors. For some reason, as Alex points out in The Number, buyers of stocks have lost sight of the value of companies paying them cash for their investment. In today’s markets, cash isn’t earned by holding a company and collecting dividends. It’s earned by convincing someone to buy your stock from you.

If you really think of it, when a stock doesn’t pay dividends, there really isn’t a whole lot of difference between a share of stock and a baseball card. If you put your Mickey Mantle rookie card on your desk, and a share of your favorite non-dividend paying stock next to it, and let it sit there for 20 years. After 20 years you would still just have two pieces of paper sitting on your desk.

The difference in value would come from how well they were marketed. If there were millions of stockbrokers selling baseball cards, if there were financial television channels dedicated to covering the value of baseball cards with a ticker of baseball card prices streaming at the bottom, if the fund industry spent billions to tell you to buy and hold baseball cards, I am willing to bet we would talk about the fundamentals of baseball cards instead of stocks.

What matters most in buying stocks is recognizing that equities are actually commodities subject to the immediate law of supply and demand. Greater demand for stocks sends them higher; Less demand -- or a greater supply (i.e., secondaries and new issues) sends them lower.

Glad we settled that issue . . .

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» What's a Stock Worth? from Trader Mike
The Big Picture highlights what Mark Cuban has to say about how stocks are valued. (Cuban's entire statement is here )Mark is absolutely right that supply and demand, and the mood of the crowd (psychology) matter much more than all... [Read More]

Tracked on Apr 19, 2004 11:45:17 AM

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Comments

Cuban's intro reminds me of the bad old days, when Jesse Livermore (or his ghostwriter) could with complete seriousness write, "stocks are manipulated to the highest point possible and then sold to the public on the way down," and be entirely right. today's IPO syndicate is the ethical version and is an essential part of capital formation.

the part of Cuban's post that rings most true to me is not the part you quoted, but rather, "the stock market has gone from a place where investors actually own part of a company and have a say in their management, to a market designed to enrich insiders by allowing them to sell shares they buy cheaply through options."

the enrichment of top management at the expense of shareholders is something you can measure. it's completely legal, quite widespread, subsidized by the government through the tax treatment of options exercise and -- given the essential fungibility of management skill -- entirely unethical in a way that the IPO syndicate emphatically is not.

Posted by: wcw | Apr 19, 2004 1:49:01 PM

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