Saturday, November 13, 2010
Logically thinking about shareholder belief.
I've previously had stuff to say about the mistaken belief that movements in the share price can tell you something about the actual business. (To find out stuff about the business you need to look at ... the business).
Now, I am thinking about the contention that seems to be common that movements in the share price tell us something about the market view (faith, belief) in the Company.
I am led to believe that about 7 million Cellestis shares have been traded in the last year. Given that some of those shares will be the same shares that have traded hands multiple times, it might be reasonable to presume that, in the last year, about 5 million shares have actually been sold. That's around 5% of the shares on issue. Now, clearly, the buyers of CST shares have been a little shy and this has resulted in the Share Price retreating.
These are just facts. However, I don't think those facts can really tell us anything at all about the shareholder faith in the business that they have invested in.
Remember, 95% of the shares in the Company have not changed hands in the last year. Those shares are not represented at all in the trading statistics, depth or on any charts.
The holders of those shares might hold all sorts of views about the Company or business - there is just no record of those views. Not even a tenuous link through the Share Price. They might have absolutely no faith in the business but are not selling because they don't want to take a loss or they may be famously happy with the investment they have made and are quite happy to wait for the investment to reward. The point is that we don't know.
If you consider the share market to be a voting machine then those people who hold their shares have no vote. In CST's case that means that 95% of shares are disenfranchised from the "election". It's a bit analogous to having an Australian Federal election where you only get a vote if you are changing your vote from the previous election. Had that been the system then Tony Abbott would be the Prime Minister of Australia (by a huge margin).
Furthermore, even looking at those few shares that have been sold, we really don't know what their motivation for selling was. Sure, it may be that some have decided that they no longer believe in this investment. Others may just be sheep who have made a faulty (in my opinion) decision based upon a sagging share price. There may be others who retain their faith and belief in the Company but for personal reasons have been forced to sell some of their shares.
To try to draw some nexus between the trading volumes/prices and what the shareholders are thinking about the Company is just plain wrong.
The trading volumes and prices tell us nothing about the business and they tell us nothing about what the shareholders are thinking about the Company or the business.
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Forrest beautifully put and absolutely correct on the basis of assuming the purpose of the post was to claim the ability to read the minds of shareholders. Rog recently posted a lovely acknowledgement by a group of journalists (I can’t find his link on a brief search but it is there) that their industry is mainly entertainment and the “news” they write is sculpted to create or promote controversy or emotion which results in more sales (that might not be exactly what they said but that was how I interpreted it).
ReplyDeleteYou have identified an age old argument about the difference between logic and sophistry. In modern parlance “Sophistry” is defined as an argument based on erroneous facts or Sophisms, to convince people your argument is correct. See http://en.wikipedia.org/wiki/Sophism. In actual fact a Sophist was initially a person who had and taught wisdom. In a bizarre twist, given your deep thinking and extensive knowledge, you would have been known as a sophist is ancient Greece, a high accolade then and a term of derision now. I personally think sophistry can be defined as just arguing. And all arguers try and make their position correct. That is what I see as sophistry, arguing to be correct rather than arguing to find the truth. A form of argument is the use of logic and the application of parsimony and this is seen as coming much closer to the truth. Unfortunately it is also time consuming and to most people I know, boring (unfortunately for some of my attempts at correct arguments). They seem to prefer the tickling of their illogical emotions by the would be journalists of the world rather than the boredom of too much logic.
So to the question of posting opinion on a discussion board, should it be all well considered (and to many boring) logic or is it always going to be mainly rampant sophistry, with argument only partly correct and often sloppily applied? Is it the considered discussion of facts or figures or is it a bunch of normal humans mainly to try to influence emotion and win a point?
I think if every post made on a discussion board needed to apply logic and parsimony before it was posted then there would be no discussion. Unfortunately, whilst I personally rail at the lack of thought and logic that goes into much of the stuff posted, it is not something that is controllable. So you have hoist me by my own hypocrisy in using cheap quick argument, lacking in logic, to try and counter some of the emotionally driven drivel coming from some keyboards. Perhaps I should have just said “Only 5% of shares have been sold this year, you are all making completely illogical assumptions on poor data, get over it”.
Cheers
Merry
This comment has been removed by a blog administrator.
ReplyDeleteThis comment has been removed by a blog administrator.
ReplyDeleteSorry for the double up but I got an error message saying it was too big on the first post so I split it into 2 and now found multiple posts, hopefully you can clean it up from your end.
ReplyDeleteCheers
Merry
Quote Its a bit analogous to having an Australian Federal election where you only get a vote if you are changing your vote from the previous election. Had that been the system then Tony Abbott would be the Prime Minister of Australia (by a huge margin).Quote
ReplyDeleteIm not using apostrophes or quotation marks to avoid those funny squiggles.
Gee forrest, Im not sure about those numbers. If you only get a vote if you are changing, then the system must start , not at nil all, but with Labor ahead by 20 or thirty seats ....... whatever it was.
Apart from that, it is most relaxing to have someone else trying to reason with the unreasonable. Got a bit lonely there.
Cheers
J
G'day Merrywise,
ReplyDeleteThanks for your comment. As requested, I have deleted the duplicate posts.
Great reading. I'm now not sure if I am a sophist or not. Furthermore, I don't know if that is a good thing or not. :)
Ultimately, there is some truth in your assessment, putting forward a cogent argument has some value in itself - regardless of the eventual outcome. I can only hope that I am open enough to accept alternate views when they are presented with some logic behind them.
And, thanks for the original post on SS. It's what started me thinking along these lines.
Ultimately, it's all a good mental exercise, trying to make sense of the world. Even for me, an uneducated lawn mower driver.
‘I make the following comment as a long term, well informed, true believer CST investor;
ReplyDeleteAnd I subscribe to the argument that market value has little relevance to the intrinsic value of a company.
The reflections about arguments based on logic and sophistry in relation shareholder belief are reasonable,
academic, text-book stuff.
However, they do not address the practical questions about the market value of CST.
Forrest’s valuation matrix (made available only with full disclaimer as a personal opinion only) on CST valuation is,
by any objective assessment, well informed
It is based on accurate historical data, and reasonable assumptions on projected data and capitalisation rates.
At least, that is my assessment and, I believe, that of a substantial number of long term, well informed,
(Non-director) CST investors.
That matrix calculates the current DCF value (i.e. present value of future cash flows) at $11.28
The current value assessed by the market (i.e. the value assessed by market participants) is $2.30.
I understand that this presents a great buying opportunity, but that does not address the reasons.
Questions
Could it be that the market is not fully (or substantially under) informed?
If so, why?
If not, how is this under valuation discrepancy of 80% explained.
Can someone enlighten me please?
Anthonb,
ReplyDeleteI believe the question you ask will be partly answered at the AGM if actual first 4 month sales are provided and reflect the (projected, hoped for, expected)growth rates I think we have been waiting for.
The impact of momentum as more labs come on stream and more tests are done should provide the 40 % year on year growth that will boost the markets valuation.
Momentum being the full year impact of last years converts plus the new conversions.
The sleeper for us all is whether the Directors are in a position to announce any new tests / developments.
Last years report highlighted the increased spending on R & D...... I hope they have been productive.
With a cash chest of $20 mill+ the right opportunity must be getting closer.