If you don't post you won't get many members! Try inviting a few people with significant numbers of relevant tags?

I'm curious, so I'll be watching and learning rather than commenting!

Two questions to get you going?

Why does the stock market "value" of a company sometimes change so radically, when the actual assests of a company - land. building people etc remain completely unchanged?

Why does the stock market expect continually increasing growth, and react to news that the growth increased but not as much as expected, as if this was performance shrinking, when it is obviously still growing?

Yup, you're right. A post is needed. Hadn't decided until today what I wanted to say, and that'll be a task for this evening.

As for your questions:

1. Market value changes because of a change in the perception of the company's prospects. Price is an expectation of a company's future earnings and expressed the "P/E" or price earnings ratio.

2. Value is based on growth. If expectations are high, investors are willing to pay more (the P/E is high). If expectations aren't met, the price falls.

As to why the market expects growth, the economy is dynamic. Companies continue to make new products, and a company must grow to maintain its market share. Also, there are economies of scale that can achieved by growth. A company that isn't growing is dying --- its stock price approaches or goes below its book value (assets minus liabilities). In short, it becomes worth more dead than alive. This is where the "vulture" funds come in and attempt to resusciate the company. If they do, they make $$$, if not they lose their investment.

I wonder why more companies don't stay private. Don't get me wrong, we need the Googles and Microsofts, etc., but Wall Street gives me the creeps, which is why it intrigues me. Still, it's like Vegas without the free drinks.

In my experience, every company I'd like to invest in is private. The stock market is really where I settle for second best. So I wish fewer of them stayed private :)

The simple fact of the matter is the private companies are much more risky. They are opaque and illiquid. You don't know what you're getting into and can't get out when things go south.

I think you've got part of it right, Bash, the analogy to Vegas. You just didn't follow it through far enough. Casinos (like Wall Street) are in the risk business. They know the odds and play when the odds favor them. Gamblers (generally) are looking for adverse odds. The greater the odds against them, the higher the pay off --- think "hot tips" or penny stocks. They will lose in the long-term becasue you can't beat the odds all of the time. It is an axiom of finance that returns always revert to mean. That's why there is arbitrage: investors seeing "out of wack" relationships and profiting when they return to normal.

A current example: The dollar is trading at all time lows against the Loony (the Candanian dollar). Do you buy Loonies thinking that they'll go higher or do you sell (short) Loonies thinking that they'll return to their customary value? The converse questions can be ask about the dollar. Go long the dollar because it will rise pact to its customary value or short the dollar because it will fall further? To short, you don't need to own what you sell. You buy what you sold (cover your short) later when price (you hope) are lower. Your profit is the difference between your selling price (say, $100) and the price at which you cover your short (say, $90) --- profit $10.

The classic arbitrage play (a convergence trade) would be to short (sell) Loonies and buy (go long) dollars. When the relationships revert to mean (converge to the usual relationship), you profit by covering your Loonie short because Loonies have fallen in value (buy at a lower price than you sold) and you profit by closing (selling) your long position in dollars.

Of course, the converge may be a long time in coming. May be you can't afford to carry the convergence trade and must sell at a loss. That's a large part of what happened to Long-Term Capital Management (see the book on the same subject in my Library).

Or there may be a secular change. The relationship form a new mean and never revert to the old mean, and you lose on both sides of your convergence trade.

Or you may not understand your investments. That's the current problem with the SIVs (structured finance investmetn vehicles) -- See A Demon of Our Own Design in my Library.

Now, to get back to my original point, the difference between the casino risk business and Wall Street risk business is that Wall Street is dynamic. A roulette wheel is a roulette wheel is a roulette wheel and the odds don't change.

Wall Street invents, and sometimes the invention (the odds) is not well understood (the current situation). Sometimes the world changes (a secular change) and relationships change for ever. Sometimes something unforeseen happens, and you don't have enough capital to ride it out.

Nonetheless, the point remains those in the risk business make money by being on the right side of the odds. That is also possible (to a large extent) for investors who take time to understand what their asked to invest in.

Some thoughts on the current situation: The problem with the SIVs (structured investment vehicles) is that the lesson of the S&Ls (savings and loan institutions) in the '80s was forgotten: Bad things happen when you borrow short and lend long.

At the heart of it, the structured instruments held by the SIVs were too complex to be properly valued. The models used by the rating agencies were simply off the mark. Added to that is classic contagion, too many people trying to sell similar instruments at the same spread the low prices to everyone.

The reason why the problem persists is that the SIVs can't be unwound because their assets are long-term. As their short-term liabilities come due, they can't pay them because of the long-term nature of their assets --- they can't liquidate the assets because of contagion and the maturity dates are far in the future. hence,they must access the short-term market, and therein lies the problem. Short-term liabilities against long-term assets: borrowing short (liabilitiers) and lending long (assets).

Barking_mad: This seems somehow wrong:
1. How do you know that market value changes because of a change in the perception of a company's prospects? Let us agree that "market value" will be the latest lowest bid for a security that was matched with an ask, okay? I.e., price. Now, if I claim (the null hypothesis here) that 70% of the intraday change in price is just systematic randomness, why would I be wrong? Okay, now make it 70% of quarterly price change. You can't just say something like this and assume it to be true!

2. You say Price is an expectation of a companies future earnings... um, no, again, what evidence? Price is what a seller will take and a buyer will give. It is expressed in dollars, or other currency.

3. Value isn't based on growth. Take, for example, a bar of gold... if you think it is without value, hey, I'll take it off your hands right now! Now, you might want to argue that a positive change in value is somehow based on growth, but it might just as easily be based on a change in tax law.

4. Fun fact of the day: In a linear regression model of petroleum (crude light futures) in 2007, 20% of the daily price fluctuation could be explained by merely counting the number of times that "Chavez" or "Venezuela" appeared on the Dow Jones financial newswires.