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The market is a discounting mechanism


Loki

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19 minutes ago, Loki said:

Can someone explain to this to me relatively simply?  As the Contrarian Investor books do not favour the efficient market hypotheses.

To value an expected future stream of income today, say from an investment, you have to "discount" it to reflect the effect of inflation. The efficient market hypothesis effectively assumes that if you put a tenner as a lot in an auction it will always get bid up to around that value, because people aren't stupid. Another way to state this is that it is a "discounting mechanism" when valuing assets on their expected income stream.

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3 minutes ago, Axeman123 said:

To value an expected future stream of income today, say from an investment, you have to "discount" it to reflect the effect of inflation. The efficient market hypothesis effectively assumes that if you put a tenner as a lot in an auction it will always get bid up to around that value, because people aren't stupid. Another way to state this is that it is a "discounting mechanism" when valuing assets on their expected income stream.

So is the discounting something that is just inherent to markets by nature or something that strategists work out?

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Just now, Loki said:

So is the discounting something that is just inherent to markets by nature or something that strategists work out?

Discounting is a tool that individual market participants use to determine what they would pay for an investment, and the market acts like an auction to arrive at a price. There are different discounting formulas, and some participants will be muppets etc, but in aggregate the efficient market hypothesis would imply that the market price would reflect the implied discounting. Which is bollocks, the whole premise of active investing is the assumption of fundamentally miss-priced assets being available.

TLDR: Just inherent to how a market functions.

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2 minutes ago, Axeman123 said:

in aggregate the efficient market hypothesis would imply that the market price would reflect the implied discounting. Which is bollocks

That's what I thought! Cheers.

 

So the eventual 'discount' is a tangible number but is just the result of all the individual market participants buying/offering at a certain price with their own view of where the stock price (For example) could go?  But the amount of discount realised is not known until some point in the future?

And that discounted percentage is the end result of the participants doing everything and anything from tech analysis to Elliott wave to flipping a coin?

Sorry if I'm over-complicating this xD

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47 minutes ago, Loki said:

Can someone explain to this to me relatively simply?  As the Contrarian Investor books do not favour the efficient market hypotheses.

Just watched “ inside job” ( where the fuck have I been) they are truly the most despicable cunts on this planet. Rant over.

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1 minute ago, Phil said:

Just watched “ inside job” ( where the fuck have I been) they are truly the most despicable cunts on this planet. Rant over.

Well yes us plebs don't have the luxury of being able to move markets, just participate 

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1 minute ago, Loki said:

That's what I thought! Cheers.

So the eventual 'discount' is a tangible number but is just the result of all the individual market participants buying/offering at a certain price with their own view of where the stock price (For example) could go?  But the amount of discount realised is not known until some point in the future?

And that discounted percentage is the end result of the participants doing everything and anything from tech analysis to Elliott wave to flipping a coin?

Sorry if I'm over-complicating this xD

The market price is what it is, although people may try to infer the discount or assumptions underpining it from the price. This will be the thinking behind journalists writing stuff attributing bond prices moving due to traders pricing in higher medium term-inflation expectations.

As you say individual market participants could be using anything from candle-stick analysis (astrology for adults) to reading chicken entrails!

A better model to understand markets is "Reflexivity" (ironically a George Soros innovation from his trading days) where market participants don't just discount cashflows based on available information, but anticipate other market participants reactions to information and the value they will assign to something as a result. Beleive it or not this was once a radical trading advantage, and the foundation of his fortune. The efficient markets hypothesis was once almost a religious doctrine, and radical shifts in markets were explained away as new information being rationally priced in.

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4 minutes ago, Axeman123 said:

The market price is what it is, although people may try to infer the discount or assumptions underpining it from the price. This will be the thinking behind journalists writing stuff attributing bond prices moving due to traders pricing in higher medium term-inflation expectations.

As you say individual market participants could be using anything from candle-stick analysis (astrology for adults) to reading chicken entrails!

A better model to understand markets is "Reflexivity" (ironically a George Soros innovation from his trading days) where market participants don't just discount cashflows based on available information, but anticipate other market participants reactions to information and the value they will assign to something as a result. Beleive it or not this was once a radical trading advantage, and the foundation of his fortune. The efficient markets hypothesis was once almost a religious doctrine, and radical shifts in markets were explained away as new information being rationally priced in.

Thanks mate.  So even bubble stocks are being subject to the 'discounting' (People believe they will find someone willing to pay more)

Basically I am just trying to understand how people are calling (General not precise) tops/bottoms/pull backs.  As the Contrarian Investor books do not value EMH, or forecasting in general, it's hard to know what approaches have any value, and whether it's a case of horses for courses (Some approaches DO work, but not all of the time)

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Just now, Loki said:

Thanks mate.  So even bubble stocks are being subject to the 'discounting' (People believe they will find someone willing to pay more)

Basically I am just trying to understand how people are calling (General not precise) tops/bottoms/pull backs.  As the Contrarian Investor books do not value EMH, or forecasting in general, it's hard to know what approaches have any value, and whether it's a case of horses for courses (Some approaches DO work, but not all of the time)

On the bubble stocks, not really. The anticipated future cash flows to justify Tesla's valuation would be huge. Describing the market as a "disconting mechanism" (and the term "discounting") is rooted in EMH, and Tesla's share price reflects pure reflexivity (ie it goes up bcause everyone expects it to go up, and is trying to front-run this by buying now and driving it up in the process).

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Just now, Axeman123 said:

On the bubble stocks, not really. The anticipated future cash flows to justify Tesla's valuation would be huge. Describing the market as a "disconting mechanism" (and the term "discounting") is rooted in EMH, and Tesla's share price reflects pure reflexivity (ie it goes up bcause everyone expects it to go up, and is trying to front-run this by buying now and driving it up in the process).

Oh yes, of course.  Cheers xD

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There is an equation called net present value, have a google make sure you find the one that includes revenue and costs. Futures revenues are discounted by a discount rate in the future, the higher the discount rate, the more worthless future revenues are after a number of years. Discount rate almost the cost of borrowing for corporate finance. SO for growth stocks future growth is discount to fuck all value with high discount rate. ON the flip side companies with revenue now but costs in future benefit if costs discounted to fuck all. I.m drunk atm so apologises if this isnt clear

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48 minutes ago, CannonFodder said:

There is an equation called net present value, have a google make sure you find the one that includes revenue and costs. Futures revenues are discounted by a discount rate in the future, the higher the discount rate, the more worthless future revenues are after a number of years. Discount rate almost the cost of borrowing for corporate finance. SO for growth stocks future growth is discount to fuck all value with high discount rate. ON the flip side companies with revenue now but costs in future benefit if costs discounted to fuck all. I.m drunk atm so apologises if this isnt clear

That makes sense thanks, i will look up net present value tomorrow

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11 hours ago, Loki said:

Basically I am just trying to understand how people are calling (General not precise) tops/bottoms/pull backs

unless you have insider info methinks most of it is finger in the air stuff....even with insider info you don't know who the other 'market participants' are, a 'whale' might have even more insider info than you

ie macro POV, well the CBs printed trillions so even a bunch o monkey writers can see prices will go up as a result of this....that's fundie inflation theory and when the whales are CBs well you've seen what happened since 2008 and into overdrive since last year lol

I got on a twitch yesterday and listened to a successful 20 something analyze a load of crypto stuff....it was fascinating...if you're a boomer ie anyone over about 25 according to these guys :CryBaby: you have trouble seeing this 'brave new world' of mega-information......if you're a typical 'boomer trader' you've had spend a decent wedge to get info on incoming buys and sells in 'boomer markets' ie Nasdaq and that's why the 'big boys' will always beat you, they pay for extra info

BUT it's different in new crypto world, a wealth of info is being made available to savvy clued up folks who are very talented in being able to use it.....as an example see here https://v3.aggr.trade/i9vq

lots of info is being aggregated from various exchanges so you get a better idea of what is going on......

the markets are moving so fast nowadays it's scary.....you need an 'edge' or 10 to succeed........a lot of fundie or fundamental stuff is out the window nowadays......I've heard a lot recently about 'auction market theory'.......methinks that's a good area to look, let me know what you think ;) 

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7 minutes ago, Loki said:

I only have phone during the day (i have a proper job xD) and half the time no signal

sure, I tend to forget some folks decide to work xD

PS not totally daytrading in the true sense of the word, but jumping on the back of some pumps...

I know the history of crypto is HODL but well errrr methinks they get 'pumped n dumped' quite a lot lol

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