Dow plunges 1000 points

Re:Dow plunges 1000 points by sokoloff on Monday February 05, 2018 @07:33PM (#16313547)

Stock prices aren't the outcome of lotto balls or coin flips. In theory, over the long-run, the price of shares will represent an equilibrium of investors' opinions of the intrinsic value of a company (divided by the number of shares). The intrinsic value is commonly modeled as the net present value of future cash flows plus a discounted terminal enterprise value.

For the same inputs (sequence of future cash flows, enterprise value, and weighted average cost of capital [discount rate]), the long-run value will be the same. If the near-term share price value rises more quickly than the long-run intrinsic value model, it is entirely reasonable to assume future growth of share price will moderate, as it must in order to converge on the same long-run value.

I think it's not at all like your example with 10 coin flips in a row.

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Re:Dow plunges 1000 points by JoeAltmaier on Monday February 05, 2018 @07:36PM (#16313557)

There's some truth to the 'random variable' theory.

I think we only value stocks the way described (intrinsic value model) because its a cultural myth to do so. We can also think of stock certificates as baseball cards - of value mostly to other collectors. Sure there's a 'book value' or 'dividend value' behind them, but that's irrelevant most of the time for most stocks.

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