ishkabibble on 11 October 2007
| skywalker2007 said: I am not talking about future earning or future potential. P/E usually reflect the discounted future cashflow of a company which is from its anticipated future growth. I am actually talking about the irrational part of investors. It can not be predicted but can be explained. If something is good, that is worth say 100, people are willing to pay say 110 for it. There is no logical reason other than they just like it. And this irrationality is not static, it also changes over time as well. I have seen many merger and acquisition in the industry that were made at much higher than market value. Why is that? It is because sometimes owner just won't sell. There are many reasons for that, some people just like the fact that own something. Some people just believe the companies worth a lot more than the market value and some people life at that time do not need large amount of cash, they need a business. If Nintendo's market value is say 40 billion and Bill Gates decided to buy it, I bet he will spend a lot more than 40 billion. Take Traveler$Aetna's Insurance(A subsidiary of Traveler's group which later on merge with Citibank), for example. I had that stock for many years and it was traded at $27 for many years(never moves!). Then one day, Traveler's group decided to buy back all the outstanding shares at something like $40 because it needs to reorganize and restructure. I sold immediately. Eventually, they did acquire all the outstanding shares and become 100% owner of the subsidiary. I always wonder, had I decided not to sell(Hey I just love this stock Okay!, I am irrational, OKay!), how much will they offer me to sell? Between 99.999% owner of a company and a 100% owner of the company the share value of that 0.0001% is much higher than its fair value. My point is: the irrational part of investors is NORMAL. We should invest assuming all investors are normal however, the NORMAL includes irrational behavior which can not be quantified into a number ...maybe a very large range of numbers at best. The NORM is also changing. |
I don't see your point. I don't care if investors overreact in the short term; fundamentals win out in the long term.
The reason we measure "fair value" or "appraised value" is so we know when to exit. If you want to instead try and make money guessing at "the irrational part of investors", good luck. It's just white noise to me.
