IV... and your estimation

[enoch01]

There are multiple estimates of intrinsic value.  The presence of estimates to IV does not refute the existence of a single IV.

 

"Possible" suggests "it could be this, or it could be that, or it might be this other thing, or perhaps that other thing".

 

There are multiple "this".

There are multiple "that".

There is only one "it".   

 

People are effectively arguing that if there exist multiple possible guesses at the answer (most likely none of them exactly correct), then there cannot be one unknown precisely correct answer.  That's flawed logic.

 

 

There are not multiple possible guesses at IV, but multiple possible IVs. The wave function will collapse to one particular IV when the observation is made in the future, but this does not mean that IV was destined to happen.

 

Or in a many-worlds interpretation you might have BRK with a market cap of $1 trillion at some fixed point in the future in 60% of the universes, but BRK is bankrupt in 0.00001% of the universes.

 

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

[ERICOPOLY]

There are multiple estimates of intrinsic value.  The presence of estimates to IV does not refute the existence of a single IV.

 

"Possible" suggests "it could be this, or it could be that, or it might be this other thing, or perhaps that other thing".

 

There are multiple "this".

There are multiple "that".

There is only one "it".   

 

People are effectively arguing that if there exist multiple possible guesses at the answer (most likely none of them exactly correct), then there cannot be one unknown precisely correct answer.  That's flawed logic.

 

 

There are not multiple possible guesses at IV, but multiple possible IVs. The wave function will collapse to one particular IV when the observation is made in the future, but this does not mean that IV was destined to happen.

 

Or in a many-worlds interpretation you might have BRK with a market cap of $1 trillion at some fixed point in the future in 60% of the universes, but BRK is bankrupt in 0.00001% of the universes.

 

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

 

+1

[jay21]

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

 

"I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No." - Eric

 

Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value?  I have issue with that.  IV can and does change.

[boilermaker75]

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

 

"I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No." - Eric

 

Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value?  I have issue with that.  IV can and does change.

 

+1

[ERICOPOLY]

IV can and does change.

 

IV estimates can and do change.  Unless you are all knowing about the future, you have only estimates (guesses).  Surely this we can agree on. 

 

How have you witnessed the movement of IV itself?  You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

[wknecht]

IV can and does change.

 

IV estimates can and do change.  Unless you are all knowing about the future, you have only estimates (guesses).  Surely this we can agree on. 

 

How have you witnessed the movement of IV itself?  You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

Going back to the coin flipping example ($1 if we win, $0 if we lose).

 

To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset.

 

Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss.

 

I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield.

[enoch01]

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

 

"I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No." - Eric

 

Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value?  I have issue with that.  IV can and does change.

 

No, I don't think "IV doesn't change" implies that.  IV is the some of all future cash flows, discounted.  Those future cash flows will be certain values, and they will not be others.

 

Like I said, everything else is educated guesswork.  Take Coke as an example.  Who will run the business, will there be a civil war in some country where they do business, will mayor Bloomberg try to ban their products, etc, etc.  All of these factors and others (presently unknowable to you and I, presumably) will contribute to the future cash flows, which would be discounted to today.

 

But, things could have turned out differently.  The company might never have existed.  Mayor Bloomberg might never have been elected, and on and on.  In those cases maybe Coke's IV would have been different than what it actually is.

[jay21]

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

 

"I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No." - Eric

 

Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value?  I have issue with that.  IV can and does change.

 

No, I don't think "IV doesn't change" implies that.  IV is the some of all future cash flows, discounted.  Those future cash flows will be certain values, and they will not be others.

 

 

Putting aside my other comments, I posed another question earlier.  What discount rate is the right one?  If you use different discount rates, you will have different IVs.

[onyx1]

IV can and does change.

 

IV estimates can and do change.  Unless you are all knowing about the future, you have only estimates (guesses).  Surely this we can agree on. 

 

How have you witnessed the movement of IV itself?  You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

Going back to the coin flipping example ($1 if we win, $0 if we lose).

 

To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset.

 

Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss.

 

I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield.

 

Looks like this is where valuation meets quantum physics.  Interesting discussion but hard to see the practical relevence.  For those interested in these issues here is a classic book that explains, in simple english, some mind-blowing phenomena of the world we live in.

 

http://www.amazon.com/The-Dancing-Wu-Masters-Illustrated/dp/0681189657/ref=tmm_hrd_title_0

[jay21]

IV can and does change.

 

IV estimates can and do change.  Unless you are all knowing about the future, you have only estimates (guesses).  Surely this we can agree on. 

 

How have you witnessed the movement of IV itself?  You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

Going back to the coin flipping example ($1 if we win, $0 if we lose).

 

To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset.

 

Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss.

 

I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield.

 

This doesn't really have much to do with the main argument, but as it relates to IV: Are you sure the IV was $.50?

[Palantir]

There are multiple possible IV's at this point in time, but only one final IV(s).

 

But how can we assume that the IV is singular (as opposed to plural) and can be known? The way I see it, an investment can have multiple IV's depending upon the observer. I rate Kate Upton...but maybe Birdman and ValueInv do not...dependent upon the observer's utility function and its internal assumptions.

[ERICOPOLY]

I added the bold, because I think it represents some confusion.  No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value.  Rather, the claim is much weaker: it will be some value X, and no other value.  To me this seems to be above reproach.

 

This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question.

 

"I disagree.  IV doesn't change.  Your perception of IV changes along the turbulent path of discovery.  You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing.  No." - Eric

 

Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value?  I have issue with that.  IV can and does change.

 

No, I don't think "IV doesn't change" implies that.  IV is the some of all future cash flows, discounted.  Those future cash flows will be certain values, and they will not be others.

 

 

Putting aside my other comments, I posed another question earlier.  What discount rate is the right one?  If you use different discount rates, you will have different IVs.

 

You cannot know with certainty what the proper discount rate is any more than you know what the actual cash flows will be.  But there is only one past, and that past revealed the correct answer up to the present.  Surely this "one past" phenomena will not change going forward.  Today's future is tomorrow's past.  Thus, one future.  We have no hope of knowing precisely what it is, only guessing.

 

 

[ERICOPOLY]

There are multiple possible IV's at this point in time, but only one final IV(s).

 

But how can we assume that the IV is singular (as opposed to plural) and can be known? The way I see it, an investment can have multiple IV's depending upon the observer. I rate Kate Upton...but maybe Birdman and ValueInv do not...dependent upon the observer's utility function and its internal assumptions.

 

The intrinsic value of future cash flows for a business is different than the intrinsic value of a woman.

 

What's the intrinsic value of the number 7?  Is it fixed in value? Or is it something you can argue doesn't exist as a single value because a woman can have multiple intrinsic values?  I think there is a flaw in your logic comparing a measurement of monetary value(money) to a woman. 

 

All the cash flows that Kate Upton produces through her life... we can talk about that perhaps in the framework of this discussion.  Because then it's apples to apples. 

[wknecht]

IV can and does change.

 

IV estimates can and do change.  Unless you are all knowing about the future, you have only estimates (guesses).  Surely this we can agree on. 

 

How have you witnessed the movement of IV itself?  You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

Going back to the coin flipping example ($1 if we win, $0 if we lose).

 

To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset.

 

Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss.

 

I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield.

 

This doesn't really have much to do with the main argument, but as it relates to IV: Are you sure the IV was $.50?

Sorry if I got us off topic. I thought this simple example got to the heart of the point.

 

In any case, we will lose money (on average) if we pay more than $0.50 and make money (on average) if we pay less than $0.50. (Note I'm obviously ignoring time value.)

 

What should we base such decisions on if not mathematical expectation? As a corollary, how could IV be anything other than $0.50?

[Palantir]

What's the intrinsic value of the number 7?  Is it fixed in value? Or is it something you can argue doesn't exist as a single value because a woman can have multiple intrinsic values? 

 

The number 7 is fixed. But how do you know that the Intrinsic value is fixed? Everybody will value cash flows differently. They will use different growth rate assumptions, different discount rates depending upon their risk calculations - always leading to a range of outcomes.

 

 

[ERICOPOLY]

What's the intrinsic value of the number 7?  Is it fixed in value? Or is it something you can argue doesn't exist as a single value because a woman can have multiple intrinsic values? 

 

The number 7 is fixed. But how do you know that the Intrinsic value is fixed? Everybody will value cash flows differently. They will use different growth rate assumptions, different discount rates depending upon their risk calculations - always leading to a range of outcomes.

 

Yes, different assumptions...

 

Only time will reveal the difference between the assumptions and the one true IV.

 

You can pull up a chart of the past risk free rates, but you cannot pull up a chart of the future risk free rates.  You can create a prediction of that chart... but that's only a prediction.

 

[Palantir]

Right, but IV always has a future value component...it is perpetual.

[ERICOPOLY]

IV can and does change.

 

IV estimates can and do change.  Unless you are all knowing about the future, you have only estimates (guesses).  Surely this we can agree on. 

 

How have you witnessed the movement of IV itself?  You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

Going back to the coin flipping example ($1 if we win, $0 if we lose).

 

To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset.

 

Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss.

 

I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield.

 

The true IV was $1 all along.  This was however impossible to know upfront and the best estimate of IV before the toss was 50 cents. 

 

The true IV is "all future cash flows".  Thus, it was $1.  This is completely separate from expectations based on mathematical probability, however ultimately there tends to be some relationship as probability (properly assigned) is quite useful in estimating the future.

[jay21]

 

I thought this simple example got to the heart of the point.

 

 

Yeah me too (that's why I thought of it  ;D).  Then I realized it was much more nuanced than I intended.

 

In any case, we will lose money (on average) if we pay more than $0.50 and make money (on average) if we pay less than $0.50. (Note I'm obviously ignoring time value.)

 

What should we base such decisions on if not mathematical expectation? As a corollary, how could IV be anything other than $0.50?

 

When we think of a business selling at IV, wouldn't we still expect to see a profit by purchasing the company at IV?  Why would you/what investor would pay the expected cash flow?  You would always require a profit.  Therefore, the IV needs to exclude $.50. 

 

Now, what is the right amount to pay?  There is a large variance in the outcomes, so what price is appropriate to subject your capital to the variance?  The Kelly Criterion comes into play here.  The larger your bankroll, the closer to $.50 you should pay.  The smaller your bankroll, you should pay closer to $.00.  So here the value depends. 

 

I am not sure how this applies to share structures though so that's why I said we might be getting off topic.

[ERICOPOLY]

Right, but IV always has a future value component...it is perpetual.

 

Not always.  For example, a business gets wound up.  A bond matures.  There are examples where you can precisely determine IV based on what is revealed by the passing of time.

 

As you suggest, there are also times where the business still has an unknown future despite our being able to measure it's past cash flows up to this present day.

[twacowfca]

The logic in this thread is deeply flawed in the arguments that IV is what it turns out to be in the future.  The flaw is the unstated assumption of no arbitrage.

[ERICOPOLY]

The logic in this thread is deeply flawed in the arguments that IV is what it turns out to be in the future.  The flaw is the unstated assumption of no arbitrage.

 

The arbitrage is part of that future.

[twacowfca]

The logic in this thread is deeply flawed in the arguments that IV is what it turns out to be in the future.  The flaw is the unstated assumption of no arbitrage.

 

The arbitrage is part of that future.

 

It is often possible to arbitrage in the present the indeterminate future state.  Financially, the present IV might be half of Schrodinger's Cat.  Or about 500 live cats out of 1000 whose future state is indeterminate. 

 

Likewise, it is possible to come up with a scheme to realize in the present the expected value of fifty cents in the coin flipping contest.  That value would be real, arbitraging the two equally probable future states.

[ERICOPOLY]

The logic in this thread is deeply flawed in the arguments that IV is what it turns out to be in the future.  The flaw is the unstated assumption of no arbitrage.

 

The arbitrage is part of that future.

 

It is often possible to arbitrage in the present the indeterminate future state.  Financially, the present IV might be half of Schrodinger's Cat.  Or about 500 live cats out of 1000 whose future state is indeterminate.  :)

 

I don't think it is possible to do anything that does not belong in the future.  Once the connectors in my brains start firing time has already elapsed.

 

[ERICOPOLY]

 

I thought this simple example got to the heart of the point.

 

 

Yeah me too (that's why I thought of it  ;D).  Then I realized it was much more nuanced than I intended.

 

In any case, we will lose money (on average) if we pay more than $0.50 and make money (on average) if we pay less than $0.50. (Note I'm obviously ignoring time value.)

 

What should we base such decisions on if not mathematical expectation? As a corollary, how could IV be anything other than $0.50?

 

When we think of a business selling at IV, wouldn't we still expect to see a profit by purchasing the company at IV?  Why would you/what investor would pay the expected cash flow?  You would always require a profit.  Therefore, the IV needs to exclude $.50. 

 

Now, what is the right amount to pay?  There is a large variance in the outcomes, so what price is appropriate to subject your capital to the variance?  The Kelly Criterion comes into play here.  The larger your bankroll, the closer to $.50 you should pay.  The smaller your bankroll, you should pay closer to $.00.  So here the value depends. 

 

I am not sure how this applies to share structures though so that's why I said we might be getting off topic.

 

wknecht,

The real IV of the coin toss is either 0 or it's $1.00.  There is no other possible outcome.  (hey, you asked how IV could be anything other than 50 cents  ;)) You either get $0 if it's heads, or $1.00 if it's tails.  There is absolutely no chance in hell that IV could be 50 cents.

ironically though, estimated IV is just like you say, .50c because we have no other tool than predictive powers (and we have a lot of confidence in the equal heads/tails weightings).  So we have no hope but to assign an estimate that we know for certain will not be correct in one iteration of the coin toss.  In estimation efforts, we do our best.

.