Comment by Retric
3 years ago
I agree with your point in general, a stock doubling or getting cut in half doesn’t necessarily have any obvious explanations. However, stocks aren’t a pure random walk, they are somewhat bound to the underlying business even if you don’t have enough information right now to understand what’s going on.
So, the kind of extreme stock shifts like dropping to 10% of a previous valuation are much more likely to have an understandable cause even if the trigger is random.
I'm in a cynical mood, but I'll begrudgingly accept "somewhat bound to the underlying business" :)
I guess at the root of my skepticism is that so many "growth" stocks never pay any dividends, so it's unclear to me what the connection between the stock and the company's cashflow is even supposed to be. If a company never returns any of its profits to its investors, isn't it just kind of a gentleman's agreement to pretend that the traditional way of valuing the company's equity still applies? It really does seem to me that the market for many stocks has detached from the company's business, and is instead driven almost entirely by competing memes.
Companies are ultimately controlled by their shareholders, no gentleman’s agreement needed. If that price falls far enough corporate raiders are happy to chop up the company for a quick buck.
Not really though. They're controlled by their executives, who can theoretically be removed by their boards, but often with significant difficulty. And the connection between the board and the shareholders at large is also more tenuous than I once thought.
It's true that a dropping stock price can lead to a takeover and new management, but again, that could happen to both a well managed financially strong business that has just lost the narrative game.
That's the only point I'm trying to make, that in theory stock prices are driven by financials, but in practice it's a mix between financials and narrative, and I think narrative dominates more than I was taught back in economics classes.
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