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Comment by adam_arthur | Hacker News Reader

What something's worth is what somebody is willing to pay for it.

And conventionally, we use the marginal buyer's bid as the measuring stick for public companies. e.g. the share price

Of course, the intrinsic value based on currently known data/fundamentals is unchanged.

But many market valuations are disconnected from that to begin with. Loans, options, warrants, many things are tied to the market cap/share price of a company. E.g. what is the LTV ratio when lending? What are my RSUs worth?

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> What something's worth is what somebody is willing to pay for it.

This is completely and definitionally true in the context of trading, but keep this definition on a leash because if you apply it outside a purely financial context it tends to smuggle wealth-weighted objectives into your thinking, and regardless of whether or not you think that's moral you probably want to be aware of it. Example: feeding orphans is zero "value" because they can't pay you but merging the banks into a mega-bank to raise fees and collect bailouts has extreme "value" because it can make a bunch of obscenely rich shareholders even more obscenely rich and they can carve you off a mighty slice.

Due to this mismatch I keep both definitions in my pocket: Wealth Weighted Value for finance, People Weighted Value for more colloquial settings or moral analysis. "Exchange Value" is a good quasi-synonym for WWV if you want something less confrontational.

The point is that market cap doesn’t tell you what people are willing to pay for a company. When a stock price is $100, that means people are willing to pay $100 for one share. And then because big companies have a big market for their stocks, this can be extrapolated out to a few thousand or millions of shares without much loss of accuracy. But it falls apart when you go beyond a small fraction of outstanding shares. A $100 price may mean people are willing to pay $100 million for a million shares. But it probably doesn’t mean people are willing to pay $1 trillion for ten billion shares. At some point the marginal willingness to pay will shift.

This becomes visible in buyouts where the cost of acquiring a company is significantly higher than the share price multiplied by number of outstanding shares.

its literally the upper bound.

You mean lower bound? The market cap is the minimum you could pay to acquire that company at that moment, but you’d almost certainly have to pay more.

Depends on whether you’re buying or selling.

Tell that to someone doing a buyout...

How does one talk so confidently about something they know nothing about?

its the upper bound to value. Net worth is calculated as market cap of your assets, but look at Elon Musk. Right now there’s not enough people to buy his net worth his liquidation potential is drastically lower than his net worth. Ergo it’s a lie. Some people understand that, most don’t. It’s abused and marketing in some cases.

Nope, wrong. Go try to buy a whole company and see if you can get it for less than the current quote. You can't. Every buyout is done at a premium.

You are out of your depth.

That is price not value.

the market cap is described in USD, but don’t get equal value of it and you definitely don’t get more.

If somebody would buy it for more, he would have already.

If somebody has a car and he gets 30_000 USD for it, that’s the value of it. If somebody wants a cart and he can get it for 30_000 USD that’s the price.

How do you plan to estimate value if you estimate it at the price somebody might pay for it in the future. It’s proofing too much.

> If somebody would buy it for more, he would have already

Have you not noticed all buyouts are at a premium?

To repeat - you are just miles out of your depth here.

Ad hominem.

I’m aware that buyouts happen at a premium, but I state that this is not a valid argument to conclude market cap => value. If that statement would be true. Every share would be worth infinite money, as theoretically a buyer could show up and bid for infinite money.

Nobody said market cap is > value. You seem to misinterpret basics. Buyouts happen at a premium because you can't buy all the shares at last trade or current offer or anything of that nature. You can't sell them all at last trade or current bid or anything of that nature either.

So, we are left with the last trade, or the mid point of the bid/offer, as the best proxies. It is what it is.

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