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All valuation has a degree of subjectivity as price really is set by buying pressure vs. selling pressure.

Yep.

And that's where you're missing my point.

I'm not talking about the specific value of a share in isolation, but the fact that the Ponzi effect distorts values across the entire market - which is mainly what drives the creation of bubbles and the apparent creation of value out of thin air.

We're really talking about different feedback loops. At the first level you have 'rational' investment, based on an expectation of return defined purely in terms of the business itself. E.g. if I know that I have X amount of something valuable but I need $Y dollars to bring it to a saleable state, it's easy for me to estimate whether or not an investment is worthwhile.

When those expectations can themselves be traded as abstract entities, you add another feedback loop which is divorced from the 'rational' value. At this point you're dealing in fictions, and it becomes a case of what you can get away with or (literally) persuade others to buy.

This where the Ponzi effect starts driving a bubble. Book values become a combination of 'rational' values, inflated faith-based values, and semi-random volatility created by trading momentum and market-making plays by those who want to cream off a few extra %, just because they can.

In reality-based terms we're now a long way from rational values, and deep into a place where rooms full of people with servers make shit up. Book values are an act of faith and exist only as long as people are willing to keep that faith in a future return. This becomes defined by market momentum, and not so much because of a specific business case.

Once that faith disappears the bubble pops, and values return to something that might pass for a rational assessment.

A company like Apple can catch the wave of sentiment that drives a bubble and ride it to the top of the optimism curve. But the rational element of share value can easily be swamped by pseudo-value created by Ponzi-like trading.

(Did we learn nothing from the Internet bust?)

As for taxes preventing volatility - considering the almost mythological volumes of trading on the markets, these taxes don't seem to do much to dampen enthusiasm for speculation.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 22nd, 2007 at 09:16:39 AM EST
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