Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP
Path: utzoo!watmath!clyde!burl!ulysses!bellcore!decvax!ittatc!dcdwest!sdcsvax!sdcrdcf!hplabs!hao!seismo!umcp-cs!aplcen!jhunix!ins_aprm
From: ins_aprm@jhunix.UUCP (Paul R Markowitz)
Newsgroups: net.invest
Subject: Re: Stock market a present value machine
Message-ID: <2309@jhunix.UUCP>
Date: Fri, 21-Mar-86 12:13:01 EST
Article-I.D.: jhunix.2309
Posted: Fri Mar 21 12:13:01 1986
Date-Received: Wed, 26-Mar-86 03:27:47 EST
References: <1738@decwrl.DEC.COM> <5931@allegra.UUCP>
Organization: Johns Hopkins Univ. Computing Ctr.
Lines: 44

> >>Someone mentioned that the stock market is just a present value machine
> >>This can't be totally true...
> >Wrong. The price of a share of stock is the net present value of the
> >company divided by the number of shares outstanding...
> 
> Other factors which influence the price of a stock are:
> 
> 	- The prospects of the company
> 	- The prospects of the economy
> 	- The health of the president (of the United States)
> 	- The adjectives used most recently in news articles about the company
> 	- The opinion of Adam Smith
> 	- The weather
> 	- The phase of the moon
> 	- ...
> 
> Well, that's my opinion, anyway.

The expected future earnings of a company are a random variable subject
to changes based on "states of nature".  Each state of nature occurs with
some probability.  However, due to uncertainty and various other facts of
life, we don't know what those probabilities are.  Also, the expected earnings
under each state of nature are constantly changing.  The present value
is the value in current dollars that an investor expects the earnings of
the company to be worth.  This is a personal decision based on a variety
of factors that include all the things (no matter how little they have to
do with it) listed above.  That means that all those things are part of 
present value.  The stock market is a big present value machine in which
investors tell each other what they expect the value of a company to be.  Each
investor bases his decision to buy or sell based on whether he thinks his
view of the information about a company is better than the other investors.

-- 
------------------------------------------------------------------------
Paul Markowitz

"A pessimist is someone who won't call on G-d because he is certain he will
get an answering machine."
				--My sister

                   seismo!umcp-cs!jhunix!ins_aprm
		   bitnet: ins_aprm at jhuvms
		   csnet: ins_aprm@jhunix
		   arpanet: ins_aprm%jhunix.BITNET@wiscvm.ARPA