While the GameStop controversy has faded from the news headlines, the issue is still roiling the markets. I was listening to an analyst who was saying that the people who are driving up the price of the stock may themselves end up losing a bundle. Some analysts are calling it yet another bubble that will burst at some point and then the stock price will revert to a more realistic value. But what is a realistic price of that stock? It seems to me that the price of a company’s stock is not based on anything tangible.
The price of a tangible object like a car, for example, would be roughly based on the cost of the raw materials plus the cost of the labor that went into its production plus the overhead costs plus the profit, with the sum total divided by the number of cars that are produced. If we think analogously, the price of a company’s stock would be based on the value of the sum of the company’s assets divided by the amount of stock that the company sold. In the old days when companies were mainly brick and mortar and had physical assets, one could place at least an approximate value on all those things and arrive at a rough value for the price of the stock.
In other words, one starts with the value of the company using some more-or-less concrete measures and then calculate the price of the stock. But nowadays it seems to go the other way. It is the price of the stock that determines the value of the company. Stock prices seem to be more like the price of a painting which may have very little relationship to the cost of the materials and the labor of the artist. It is determined by what people are willing to pay for it based on all manner of intangibles, such as whether they think that the company (or the work of art) will rise or fall in value in the future. Even a tweet from Elon Musk about some stock can cause it to rise dramatically.
The professionals in this business act as if they know how to price a company’s stock based on things like the price-earnings ratio. They confidently state that a stock is undervalued and should be bought or overvalued and should be sold. But I don’t really understand how they arrive at those judgments and it is this that stops me from having any ambitions of becoming a collector of any kind or directly investing in the stock market. I have no stomach for that kind of guesswork where you decide what to do based on what you think other people will do.
Samantha Bee discusses the GameStop story and how it reveals how the system is so rigged that it is long overdue for regulatory overhaul.