No. of Recommendations: 14
I won't say anything, but I will post a chart....
Oh, I absolutely agree that prices can do anything, and for remarkably long times.
But I argue that this has very little to do with a conventional view of "supply and demand" as would be the main factor in the price of, say, gold. Stock prices can go up or down with a lot of people owning stocks, and can go up or down with fewer people playing the market. You can have a doubling in the number of people watching and interested in making money on a given stock, but if the median opinion among those people of what you should pay today to make a buck doesn't change, the stock price doesn't change.
Changes in price, even large ones, are primarily changes in the consensus of what price one should pay for something today in order to make a profit from it on a target time horizon, which is different. Admittedly many (probably most) of them will be ignoring any consideration of true value and just speculating on price movements, but they still have an opinion of what should and should not be paid today to make a buck.
It's a subtle distinction, but sometimes and important one.
As an example from the pure capital goods side: the price of gold or bitcoin can not, and will not, rise unless there is an increase in demand: a larger number of people who are willing to pay a bit more or a smaller number of people willing to sell at the current price range. Without a change in aggregate demand (at any give price), the price will forever be flat. This is not true of shares of stock. A company generally has actual earnings, and the true value of a share goes up over time. Most stockholders know and expect this, and it's an effect entirely separate from rising multiples or rising demand.
As another example, Berkshire's stock seems to be at a valuation level maybe 9% above its 20 year average, and very close to the 30 year average. Nothing remarkable at all. A fellow on the Berkshire board is absolutely convinced that the extra "supply" of stock coming onto the market from continuing sales of stock by foundations to which Mr Buffett has donated shares have driven the price down an unacceptable amount, and heroic efforts must be undertaken urgently to offset this problem so that the price will be much higher. By extension of his reasoning, does this mean that if the extra "supply" hadn't come to market, the price would today be 20% or 30% or 40% above its long run average valuation level? Not likely. I think the most simple explanation is that the "supply" (shares included in the free float) isn't really a factor here. People are just plain willing to pay a certain amount for the stock, so beyond the time interval that a specific sell order goes in, a fresh bit of supply doesn't make a material difference because it doesn't change the perceived consensus value of a share.*
Supply and demand certainly matters where liquidity is insufficient to allow much at all to be discerned from price movements, but for big liquid things it generally just doesn't matter that much in the strict sense. Apple and Nvidia have about 15 and 25 billion shares outstanding, but that mountainous level of "supply" doesn't seem to have crushed their share prices. Half the people paying attention to the share price and able to trade think they can make a buck by owning at these prices, so that's where it trades. More people with the same mix of opinions would not change the price.
Jim
* (issuance of new shares, especially at prices below fair value as with stock grants, of course is a different kettle of fish: that is additional supply that directly drives down the true value of already existing shares because each one owns less of the underlying business. This is true whether those shares enter into float this year or not)
