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Let me get this out right now: Valuations mean jack shit (companies/houses/startups/humans - whatever). Especially "market caps".

Understand this:

21.91 million shares of Apple were traded yesterday. That is $14,460,600,000 moving around. [1]

Now you must adjust down for HFT traders, market makers, option hedgers, futures guys and anyone else who trades massive amounts of stock each and every day. My rule of thumb is ~10% actually moves hands (rather than just being moved around).

So now we are at $1,460,600,000. Only $1.5 billion dollars actually moved around yesterday. If you had $1.5 billion dollars yesterday you could've controlled the "market cap/valuation" of 1 billion shares and half a trillion in value.

You can control the market cap of anything utilising the fact that valuation uses multiplicative leverage on stuff that doesn't exist yet. [2][3] Indeed - all those teengers you see in college at age 11? Way overvalued - come and check back in 10 years. Fallacy of exponential growth runs rampant through most of finance, and teenage "prodigies". [4]

Basically with only $1.5 billion you could control the value of $500 billion dollars worth of assets - on any one day - that's it. This is how you get bubbles. This is how you can have stock market booms and busts.

Valuation leverage allows you to bid up prices for any stock using less than 2% in actual value, selling to the next tulip buyer whenever they come in trading. [5] If you had to use 100% cash - well there just ain't enough to go around my friends!

Startups?

Invest $20K just like YC does, valuing a company at $1 million - pre-product and sometimes even pre-team! The million dollars just ain't there yet - but everybody - look yonder - valuation and investor interest over the horizon!

Venture Funds?

Instagram received a $50 million cash injection which valued it at a cool $500+ million - pre-revenue. $500 million in cash wasn't actually in the coffers (or on the horizon) but Facebook look - just look - at our valuation/predicted growth - you gotta buy us out (with cash of course). And double the price while you're at it.

~2% of the world's value actually exchanged hands yesterday on the world markets.

~0.5% of market participants actually moved the prices that the rest of the world was priced at.

Hold ~2% of the world - and control it all.

Valuation is bullshit - it's like leverage without the cost of capital.

Sources:

[1] - https://www.google.com/finance?client=ob&q=NASDAQ:AAPL

[2] - https://en.wikipedia.org/wiki/Valuation_(finance)

[3] - https://en.wikipedia.org/wiki/Leverage_(finance)

[4] - http://xkcd.com/605/

[5] - https://en.wikipedia.org/wiki/Market_capitalization




I'm not so sure that temporarily changing the market cap of apple really would count as controlling it.

It's like saying: I can jump on the field at a Yankee game and "control" 50k spectators and 50m viewers. You may influence them for about a second, but the farther you try to bring the situation from the market's desire, the quicker you'll be corrected.

Sinking 1b into selling apple short would make a small, temporary dent in their market cap.

If you think something is overvalued, you should sell it short. If you think ycombinator companies are overvalued, you should contact the investors and give them odds against the ycombinator startups successes, and it would be in their best interest to take you up on it as a hedge.

In general terms, if you claim to have knowledge of a mispriced asset, there always is an implied economic action you should take to make money off of your unique knowledge.


You ignore the effect of feedback loops. You are also making the fallacy of reification (market doesn't want anything).

They key part to this lesson is that valuations are essentially arbitrary (not about market manipulation - although market dynamics are an interesting subject). Take no stock in them (pun intended) - just like you should ignore the predictions of pundits.

The following examples exemplify the meaninglessness of valuations:

If I had a kid, he/she would be worth more to me than anything else in this world. But as much as I'd adore him/her - he/she ain't worth jack to anyone else. If I'm dying of dehydration - the next cup of water is worth most of my future earnings. If I just had a glass - it's worth next to nothing. Dying because a fire is burning and you're running out of air? Oxygen tank would be pretty handy right about now. Got enough oxygen? Pfft don't need your tank.

Valuations are and will continue to be meaningless.

> try to bring the situation from the market's desire

I doubt it - you need regulatory agents to rein it in (security). Also - you are making the fallacy of reification right here.

Otherwise - it's a free for all.

Audiences love that stuff.

PS: Shorting a billion in Apple would seriously depress its price as feedback pulls in (stop losses and latent short orders) - and if you hook it up to another one - like say a debt crisis - well now you have some fun on your hands.

Also your name reminds me of that dancing monkey problem I must write about some day.


If I'm dying of dehydration - the next cup of water is worth most of my future earnings. If I just had a glass - it's worth next to nothing. Dying because a fire is burning and you're running out of air? Oxygen tank would be pretty handy right about now. Got enough oxygen? Pfft don't need your tank.

These are examples of arbitrageable opportunities. The wealth you can create by moving a glass of water from a lake to a desert is a real thing. Valuations aren't "meaningless" in that way unless you take the extreme nihilist position of everything being meaningless because it would change in a different situation. That's not meaninglessness, it's just context-sensitivity.

The fallacy of reification only occurs if you assign value to the existence of things (like "we should reduce regulation because the market wants it"). It's perfectly useful and common to say things like "the market wants" to mean "the market acts in a way such that were it a sentient being it would act this way because of a conscious desire" without actually holding the view that the market is a sentient being. That's just how English works (see, I did it right there).


People conflict agency with representation all the time.

This is not a good thing for every situation - especially abstract concepts such markets and governments.

I never said statistical arbitrage was not possible. I merely indicated that another's valuation is meaningless to your decision about future profits generated by an entity.

I'm probably a nihilist then aren't I. Why bother arguing with me at all then? :-)




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