What do you think of this comment: Say a stock has a float of 1 million shares and trades at $100. That is $100 million in wealth. If the company goes bankrupt, society as a whole now has $100 million less wealth. If 30% of the float were shorted at $100 and the company goes bankrupt, there will be $30 million of wealth still in society. Willy
if the company goes bankrupt, thats 0 wealth for the shareholders, and some of the creditors, but the assets are sold and some of the creditors should (in theory) get some $$ back. i’m not sure that saying a company trades at $X means $X value in wealth for society as a whole. leverage… that wasn’t as articulate as i intended when i started typing.
WillyR Wrote: ------------------------------------------------------- > What do you think of this comment: > > Say a stock has a float of 1 million shares and > trades at $100. That is $100 million in wealth. > If the company goes bankrupt, society as a whole > now has $100 million less wealth. If 30% of the > float were shorted at $100 and the company goes > bankrupt, there will be $30 million of wealth > still in society. > > > Willy no because the people who lent the shares lost $30m so net you get 0
ZeroBonus Wrote: ------------------------------------------------------- > WillyR Wrote: > -------------------------------------------------- > ----- > > What do you think of this comment: > > > > Say a stock has a float of 1 million shares and > > trades at $100. That is $100 million in > wealth. > > If the company goes bankrupt, society as a > whole > > now has $100 million less wealth. If 30% of > the > > float were shorted at $100 and the company goes > > bankrupt, there will be $30 million of wealth > > still in society. > > > > > > Willy > > > no because the people who lent the shares lost > $30m > > so net you get 0 The people who lent the shares were going to lose 30 anyway if they were planning to hold. Its the sucker that bought the loaned shares who loses his 30 and balances the equation.
dlpicket Wrote: ------------------------------------------------------- > ZeroBonus Wrote: > -------------------------------------------------- > ----- > > WillyR Wrote: > > > -------------------------------------------------- > > > ----- > > > What do you think of this comment: > > > > > > Say a stock has a float of 1 million shares > and > > > trades at $100. That is $100 million in > > wealth. > > > If the company goes bankrupt, society as a > > whole > > > now has $100 million less wealth. If 30% of > > the > > > float were shorted at $100 and the company > goes > > > bankrupt, there will be $30 million of wealth > > > still in society. > > > > > > > > > Willy > > > > > > no because the people who lent the shares lost > > $30m > > > > so net you get 0 > > > The people who lent the shares were going to lose > 30 anyway if they were planning to hold. Its the > sucker that bought the loaned shares who loses his > 30 and balances the equation. oh yea. was looking at it the wrong way
i’m not convinced that it has to net 0. if a company becomes more efficient (via technology or whatever), then it will be creating wealth and the stock price will probably go up. just because the price went up doesnt mean someone lost money and that the net wealth on society has to equal 0… right? I think the only way to create real wealth in society is to become more efficient. There are a lot of ways to change the firm’s MV… you can increase the amount of debt you take on. that doesn’t necessarily increase or decrease the amount of wealth. the shareholders are going to require a higher return though. maybe i’m not on the right track, but i feel like they’re two seperate (although related) topics.
WillyR Wrote: ------------------------------------------------------- > What do you think of this comment: > > Say a stock has a float of 1 million shares and > trades at $100. That is $100 million in wealth. > If the company goes bankrupt, society as a whole > now has $100 million less wealth. If 30% of the > float were shorted at $100 and the company goes > bankrupt, there will be $30 million of wealth > still in society. > > > Willy I’m not sure that the $100 million in wealth is real wealth. If I have 10 shares, and manage to sell them for $101, then the buyer just paid me $1010, but the market cap is now estimated at $101 million. That’s $1 million more than previously, even though only $1010 changed hands, and (assuming I bought my 10 shares at $100) people only paid $10 more for the company than I already paid. So I think that the $100 million market cap is not real wealth. If the company is bankrupt, then in fact there is zero real wealth in the company, and everyone who bought it is just throwing money into an incinerator. Society is less wealthy not because the stock price of the company went down, but because that $100 million could have been invested in a company that actually has productive activities. The people who are shorting the 30% are pulling money out of the incinerator. That would suggest that shorting is a good thing for society because it means that not all of the money is completely wasted, and that wealth can be recovered for productive investments elsewhere, whereas a long only society would simply have money go into the incinerator. OK, so now that I’m at the end of this post, I guess that if there is no shorting and the company goes bankrupt, society might be poorer, but probably not by $100M. The reason society is poorer is not because the company lost value, but because of the opportunity costs of not investing in something more productive. To get the exact figure for the loss, you’d have to track all the buys and sells to figure out how much each stock was actually acquired for and do a kind of weighted average.
lol bchadwick… you rock. that’s exactly what i was attempting to say. Society is less wealthy not because the stock price of the company went down, but because that $100 million could have been invested in a company that actually has productive activities.
Score for Bchadwick. I really like your posts.
it certainly is real $100M wealth - under control of current mgmt. if the market value was not right, someone would move to acquire/short. if a new mgmt can create more value, lets say 150, they would be willing to buy for up to that amount. just the transfer of control itself would create 50 in new value. now, the shorts question. lets simplify and assume away the multitude of interim xtns that chadwick spoke about. company worth 100, management will get drunk and make a stupid decision tonight and run the company into the ground by the morning. tomorrow’s value 0. a short seller sells the 100% of the company short, buys tomorrow in liquidation for 0, makes 100 + control of company. old mgmt lost 100. with shorts, net for society = [100 + control] - 100 = equity value under new mgmt. without shorts, net for society = -100 + equity value under new mgmt (old mgmt lost 100, new buyer bought equity for 0) i.e., with shorts, you’re up 100. note that no value is added / destroyed for the liability owners in either case, they still get what they are owed.
think of shorts as something that has value, something new/different/innovative. if it didn’t exist, of course the value in society would be lower - society didn’t get the advantage of the ‘shorts technology’. [where’s my baseball bat - i’m going to DC to whack ben and hank]
This is not different from a non-short senario: Say the market cap of the stock right now is $100 million. Group B purchases the entire company for $100 million from Group A. Group A basically cashed out at $100 million, and they are off the hook. Say the stock drops to $zero. Group B lost $100 million, and Group A gained $100 million. It’s a zero sum game. The cash amount is still $100 million in posession of Group A. Now comes the shorting part. Lets say, Group A continues to hold the shares which Group B shorted. That is, shares of Group A have been lent to Group B, which in turn sold them to Group C. So we have Group A owning $100 million worth of stock. Group B having $100 million in cash, and Group C, owning $100 million in shares. Note that both Group A and Group C own the same shares, dual ownership of shares, if you like. Say the stock hits the ground, what’s the outcome? Group A loses $100 million of their paper profit. Group B is sitting on $100 million in cash, and Group C has lost $100 million of their paper profit as well. The cash amount is still $100 million. If you follow the cash movement you will see that it is a zero sum game, and so the stock market wealth is not affected, with regards to the original question.
you’re incorrect in assuming its just about cash - its about value, and value depends on who has control and will decide how the assets/liabilities are managed. the paper share giving ownership rights to net assets is worth different amounts depending on who is in control.
Clarify please. The original question asks if wealth is any different if shares were shorted instead of being all long. It makes no difference whatsoever. Talking about company efficiency or value to society is not the point.
the last sentence specifically mentions wealth in society, not about cash in society. and wealth is created via economic efficiency. Say a stock has a float of 1 million shares and trades at $100. That is $100 million in wealth. If the company goes bankrupt, society as a whole now has $100 million less wealth. If 30% of the float were shorted at $100 and the company goes bankrupt, there will be $30 million of wealth still in society.
rohufish Wrote: ------------------------------------------------------- > it certainly is real $100M wealth - under control > of current mgmt. if the market value was not > right, someone would move to acquire/short. > > if a new mgmt can create more value, lets say 150, > they would be willing to buy for up to that > amount. just the transfer of control itself would > create 50 in new value. The company may or may not have value, but there’s no reason to assume that (shares outstanding)*(last trade price) is what that (equity) value is. Even if it were, you almost certainly couldn’t purchase the whole company for that amount - as you purchase more and more shares, the price is likely to rise for liquidity and demand reasons. That’s the control premium. But even if you could purchase the company for that amount plus a control premium, there’s no reason that this is what the company is actually worth. Just because I pay $100 for an orange doesn’t mean that oranges are now worth $100. It might just be that I was dumb to buy it, or I paid $100 because I think it has an image of the Virgin Mary on it. If I buy the company for $150 million because I think my management expertise can add $50MM to its value and then I discover that there’s a ton of depreciated equipment that needs to be replaced and there’s no cash to do it, and the company is about to go bankrupt, it isn’t actually worth $150MM, even if that’s what I paid the other shareholders to take control of it. If I make that decision to spend $150MM and discover that my due diligence was bad and the company is about to bankrupt and I can’t really do much about it anyway, then I’ve thrown away at least $100MM, and I may not even get the synergy value I thought I would get. To some extent, society loses $100M either way - the previous shareholders lose value, or I lose it, but if the previous shareholders all bought the company at $20, and it is at $100 because some clown had to dump some shares in a hurry, the entire economy didn’t necessarily lose as much if I don’t buy it as it does if I do - because I’m taking cash and putting it into an unproductive use when if I had been smart I could have found a productive use. Anyway, I’m not trying to pound down anyone’s argument here - I’m just trying to think through the difference between market cap and what the actual company is worth. If the market is informationally efficient, there should be a close correlation between market cap and actual worth, but if you allow for inefficiencies, then it’s just an estimate, and possibly not a very good one at that.
we’re getting into some good theoretical material here, good thread. here’s some more thoughts, and this is where i draw heavily from the American Society of Appraisers’ Private Business Valuation (i took the BV 201 - 204 series for fun/interest/whatever), and all this stuff is well hammered out there. we just scratch the surface in the CFA program about all this arcana. > as you purchase more and more shares, the price is likely to rise for liquidity and > demand reasons. That’s the control premium…" nope, thats just the marginal value of the shares just transacted, driven by marginal demand/marginal supply. the control premium is a totally separate issue. it is measured relative to the value of shares owned by minority shareholders (noncontrolling position). i.e. noncontrolling equity share value + control premium = control equity share value > I’m just trying to think through the difference between market cap and what the actual > company is worth. If the market is informationally efficient, there should be a close > correlation between market cap and actual worth, but if you allow for inefficiencies, then > it’s just an estimate, and possibly not a very good one at that. there are three ways to value a company - market approach, income approach, asset approach. theoretically, if your assumptions are correct and you include everything of value, each of these three will result in the same value. theoretically. the market cap is one way to apply the market approach. looking at past transactions in that company’s equity is another, looking at transactions in comparable company’s equity is yet another, looking at market caps of comparables is yet another. these are all techniques within the market approach. chadwick is absolutely correct when he says that market cap is not the “actual worth” as he phrases it. i think he is referring to the concept of intrinsic value with that term. as he points out, the market cap is just the marginal value assigned by the marginal buyers/sellers at that time. my point is that intrinsic value (neutral in terms of synergies to the average buyer) is different from the value of that company if under the control of A or B or C (each different value depends on the synergies specific to that buyer).
Thoughts? new Posted by: WillyR (IP Logged) [hide posts from this user] Date: September 19, 2008 03:05PM What do you think of this comment: Say a stock has a float of 1 million shares and trades at $100. That is $100 million in wealth. If the company goes bankrupt, society as a whole now has $100 million less wealth. If 30% of the float were shorted at $100 and the company goes bankrupt, there will be $30 million of wealth still in society. Willy - - - - - - - I like this comment and think it leads to some of the value in short selling in our economy (if I dare say that). If a company had a market cap of $100M, there is $100M of support in the company and its business model. So there are people who have confidence in the company and therefore invest in it. The value in the $30M shorts is that some people think the $100M cap is too high. The shorts can pull down the cap so that money can be invested in better companies or instruments elsewhere, bringing more value to society than if the shorts were not in place. The only catch to this is that huge swings in investor sentiment could possibly bring down good companies capable of creating value.
I see what you mean rohufish, and agree. Thanks. The intrinsic value of a company can change dependin on who owns it. And thanks for remining me/us about market vs comps vs asset/dissolution value. I think that makes things clearer.