One word : risk. There is uncertainty as to the company’s ability to provide that future revenue and as That uncertainty reduces, the stock price goes up.
Is this the same as positing “the market is continually surprised by the pace of technology”?
E.g., say I value company X’s stock at $100. Then I learn a new fact that there’s a 50% independent chance the company will discover a technology that doubles its value by 1 year from today. If I ignore all other factors, my estimate of the company’s value 1 year from today should then be $150. If the company discovers the technology, I’ll value it at $200, and if not, I’ll value it at $100.
For the market to trend upward as it does, it seems like either:
Everyone’s consistently getting those bets wrong, and underestimating how often/how much technology will pay off, OR
There’s something else to the story, like time-discounting or a different way of thinking about risk.
The reduction comes from the passage of time. Let’s say that a company predicts 10% growth over the year but 6 months into the year they have an equivalent annual growth rate of 2%. That doesn’t mean that they won’t make 10% at the end of the year, but it makes it less likely, so the value of the company changes to reflect that new reality.
It’s important to define risk and uncertainty. Risk in this case means probability of winning or loosing something, and can be measured, whereas uncertainty is about the lack of information about a situation and can not be measured as it is unknown. Uncertainty is reduced as more knowledge is gained about reality and as long-term risks become short-term risks, due to the passage of time, only to be replaced with new longer term
risks.
There are some really interesting concepts around the future value of money, opportunity costs and how to value companies. I’d recommend coursera finance 101 courses.
One word : risk. There is uncertainty as to the company’s ability to provide that future revenue and as That uncertainty reduces, the stock price goes up.
Is this the same as positing “the market is continually surprised by the pace of technology”?
E.g., say I value company X’s stock at $100. Then I learn a new fact that there’s a 50% independent chance the company will discover a technology that doubles its value by 1 year from today. If I ignore all other factors, my estimate of the company’s value 1 year from today should then be $150. If the company discovers the technology, I’ll value it at $200, and if not, I’ll value it at $100.
For the market to trend upward as it does, it seems like either:
Everyone’s consistently getting those bets wrong, and underestimating how often/how much technology will pay off, OR
There’s something else to the story, like time-discounting or a different way of thinking about risk.
Does this reduction come from seniority? Is the idea that older organizations are generally more reliable?
The reduction comes from the passage of time. Let’s say that a company predicts 10% growth over the year but 6 months into the year they have an equivalent annual growth rate of 2%. That doesn’t mean that they won’t make 10% at the end of the year, but it makes it less likely, so the value of the company changes to reflect that new reality. It’s important to define risk and uncertainty. Risk in this case means probability of winning or loosing something, and can be measured, whereas uncertainty is about the lack of information about a situation and can not be measured as it is unknown. Uncertainty is reduced as more knowledge is gained about reality and as long-term risks become short-term risks, due to the passage of time, only to be replaced with new longer term risks. There are some really interesting concepts around the future value of money, opportunity costs and how to value companies. I’d recommend coursera finance 101 courses.