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Why do people buy over priced stock


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Showing 1-21 of 21 posts in this discussion
Initial post: May 26, 2012 8:58:31 AM PDT
Perhaps one the first well documented instances of this strange behavior is the tulip bulb mania of the mid 17th century in Holland.

Since then there have been many bubbles included the internet bubble of the early 21st century. The latest such is obviously FaceBook.

Normally stock is a financial instrument in which people supposedly invest to get a better return than your basic savings account. Thus it is supposed to be a cold, rational, calculated decision and is all about pricing and potential return.

Since FaceBook does not have any assets to speak of one has to look at earnings and profit to get a sense of a "fair" or reasonable value of the company. Last year the company apparently had a $1 bio profit (assuming this was not artificially inflated by creative accounting to better position the company for the coming IPO).. it seems there are about 2.5 bio shares.

On the basis of its current earnings and profit FaceBook stock then is worth between $3 (conservative, if you bought the whole company at that price you'd have to wait 7.5 years to get your money back) to perhaps as high as $10 (for those who are really bullish and hope profits will increase significantly).

Yet it sold at $38 (currently around $32). Best case scenario, its profit would have to more than triple before investors start seeing a return on their investment.

But this question is not about FaceBook. It is about why people historically tend to buy overpriced financial instruments. Ignorance is no longer an explanation, as everyone had access to FB financial info, a calculator and presumably learned some basic math in high school.

Is it a gambling instinct lurking around (what if this thing by miracle really takes off ????). Or is it the old " there is no investor that cannot be fooled at least twice"

And what does it say about markets ? If people pay irrational prices for any goods, then "natural" price regulation by markets is not really working.

Posted on May 26, 2012 9:36:36 AM PDT
read the book
where are the customers yachts

the only people making money are the brokers
same as bookies they get a guaranteed vig

and outright crooks who scam people

stocks are zero sum game
you cannot make money without someone else losing

mob psychology takes over with tulips and ipos like facebook
its the greater fool theory
buy it at overpriced cost hoping a bigger fool will pay me even more
and that i sell before the collapse

but if i lose my shirt (and i am a big bank) then the govt will give me your money back

Posted on May 27, 2012 3:47:27 AM PDT
j says:
There used to be a time (in the 60's) when a stock could be evaluated fairly based on its performance, management etc... Nowadays, as we have seen, it is based on nothing more than the ability for the wealthy to get in and out in the fastest possible time. If you or I purchased a stock worth 100 and it went up a dime we would probably keep it. The rich crooks would promptly sell, given that 10 cents in holdings worth millions of stock is a big deal indeed. Besides, congress has given it self the right to insider trading while the rest of us go to jail. In short, investing in the USA, no matter what in, is a losing proposition. Housing is given a thorough shake down every 10 yrs or so, leaving many holding onto their belt-less pants. When living with snakes, learn how to bite or you have no business living with vipers.

Posted on May 27, 2012 3:50:03 AM PDT
j says:
Ignorance + greed = new yachts for the movers and shakers.

Posted on May 28, 2012 10:24:19 AM PDT
Captain says:
Because underpriced stock is so hard to find, don't you agree?

In reply to an earlier post on May 28, 2012 12:19:36 PM PDT
reply to Captain's post:

all stock is ovepriced

all companies , in the long run, go bankrupt
and the stock becomes worthless

you are gambling tht you can sell it to another sucker sooner

In reply to an earlier post on May 28, 2012 12:38:59 PM PDT
TN says:
Greed.

Then someone starts to take profit before others and fear sets in.

History will repeat itself.

Posted on May 28, 2012 5:23:09 PM PDT
DarthRad says:
Current P/E ratios are far higher than what historically was considered to be good or average buying opportunities. It's the "new normal" of our current out of whack economic times. The flood of cheap money from the Fed and absurdly low interest rates is what is keeping the markets afloat.

Sooner or later, this flood of cheap money is going to have to be shut off, or hyperinflation will start. When that happens, watch for the stock market to drop, and for PE ratios to go back to their historical norms.

I believe that is more or less what happened in the Great Depression, in the rebound Recession of 1937, when the cheap money got shut off and the Keynesian economics of the early FDR years ran their course. After several years of recovering from the initial Crash of 1929, the stock market crashed again in 1937.

Lots of potential triggers for another crash - the Fed cutting back on cheap money causing interest rates to rise, the Fed NOT cutting back on cheap money and hyperinflation setting in, the Germans kicking Greece out of the Eurozone thus precipitating further financial collapse in Europe (Europe is already in another recession), or Israel bombing Iran and thus sending world oil prices through the roof (and triggering another global recession).

I feel like the currently sky high PE ratios of the stock market are just a box of dynamite waiting to explode, for the unwary investor.

In reply to an earlier post on May 28, 2012 8:38:40 PM PDT
reply to DarthRad's post:

hyperinflation is imminent

In reply to an earlier post on May 29, 2012 5:22:30 AM PDT
freedom4all says:
I fear you are correct, as the Fed will not allow a correct to restore the value of the currency. The interest on the National Debt would bring down the government. Bernanke is between a rock and a boulder.

Posted on May 29, 2012 10:03:14 AM PDT
abolish the fed
go back to the gold standard

dont let govt have teh ability to inflate anymore

i used to like nixon
but he screwed us over big time when he took us off the gold standard

idiots thought they would sell gold to protect the dollar
and discovered teh vault at fort knox was already empty

In reply to an earlier post on May 29, 2012 11:53:20 AM PDT
Facebook does have assets, and liabilities, and the difference between them, the "book value", is what the company is "actually worth." If Facebook stock paid dividends, i.e. a share of the profits, then you could add something to that value in anticipation of the return on investment the dividends would represent. Since it doesn't pay dividends, though, your only hope to make any money is for someone to decide they want to buy your shares from you at a higher price than you paid, with no prospect of making money other than by doing the same down the line--kind of like a Ponzi scheme...

Posted on May 30, 2012 12:39:08 AM PDT
Last edited by the author on May 30, 2012 12:41:06 AM PDT
patrick says:
I was astonished, at a shaky and dark time in global economics, America in deep recession and showing little real signs of emerging, and even recoveries these days are increasingly jobless recoveries anyway...
the mighty EU teetering on Third World basket-case conglomerate..
the few countries supposedly doing well such as this one, largely riding the coat-tail of 9% Chinese growth, it wont take a crash in China to knock us off our feet, all it will need is for 9% growth to slow to 4%, a growth rate the US and EU would still kill for...
You can bet that at least that slowdown in PRC is in the pipeline.

and against all that, what is to me basically a teenagers' beating each other up website still gets takers at $38 a share, and sells ...was it really $100b worth??
What would it have been like if we were still in a global boom?

these people are SO BRAVE the only possible explanation is that theyre mostly using someone else's money..
Timely how GM cancelled a large parcel of advertising with Facebook in the middle of it all...someone with an evil mind might even suspect an attempt to manipulate the market..

In reply to an earlier post on May 30, 2012 1:59:55 AM PDT
Last edited by the author on May 30, 2012 7:49:01 PM PDT
TN says:
FB is in the advertising business with its 900M subscribers. Their pay-per-click rate is quite high, $1 per click. If there're enough advertisers, they'll do well. But then again, Ive been wrong before. I owned some of the first cell phones by necessity, but I couldn't imagine cell phones would be someday everywhere. Mr. Simm in Mexico bet on cell phones and he is now one of the top 5 richest people.

I myself have never bought anything I've seen of FB but others might. It's a number's game.

Groupon IMHO is a way overpriced stock.

Posted on May 30, 2012 6:36:25 PM PDT
B. A. Dilger says:
Why do people buy lottery tickets? When the fever hits...

Maybe it's some kind of participatory ritual, like moths dancing around a fire or lemmings jumping off a cliff. Kinda like bowing before Moloch while the priests chant.

In reply to an earlier post on May 30, 2012 8:20:53 PM PDT
I am in 100% agreement with you DarthRad.The fact that money is no longer backed up by a commodity is a subject that demonstrates how deep the corruption and power plays actually go.That and derivatives,money made out of thin air are the destruction of the world as we know it and still the wealthy power structure that people refuse to believe in will become even more powerful.I am grateful that my life is almost over and I hopefully won't have to watch the results.It isn't that far off but I am fearful per se that it is too late to ward off

In reply to an earlier post on May 30, 2012 8:27:22 PM PDT
That lottery ticket is a dream that will in time come true for someone.It is rather fun to buy a one dollar ticket and fantasize what one would do with such an amount.I have a standard that I will only buy a single ticket if the jackpot reaches one hundred million dollars.I might even buy a friend a ticket and give it to them prior to the drawing.

The harm is in spending money that one can ill afford to lose in hopes of hitting it big,but,without those types the jackpot would be slower in building.

In reply to an earlier post on May 30, 2012 9:33:25 PM PDT
cheaper than a movie
and jsut as entertaining
brings more hope than many drugs

In reply to an earlier post on May 31, 2012 8:11:01 AM PDT
B. A. Dilger says:
Seriously, in today's stock market environment you might as well invest in lotteries, the odds are against private individuals making it big. Does anyone know about the big computers placed next to the Wall Street building that make thousands of decisions a second? Like most gambling, the big money goes to the pros.

Posted on May 31, 2012 9:21:39 AM PDT
millions if not billions per second

and they are close to gain a few microseconds edge in sending their trade orders

if you are remote and have to go through extra servers then the market will change before your order gets there and you pay more or sell lower because of it

In reply to an earlier post on May 31, 2012 7:10:24 PM PDT
patrick says:
yeah...lottery tickets cost a few bucks each...

and youre not looking for a building to leap off when they strike out..
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Discussion in:  History forum
Participants:  11
Total posts:  21
Initial post:  May 26, 2012
Latest post:  May 31, 2012

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