The intrinsic value of something — a Bitcoin, an oz of gold, or a share of GameStop — is simply what folks believe it is. Nothing else matters, Mark Cuban argues in a latest blog post. That idea is the secret to understanding Bitcoin, stamp collecting, and the latest GameStop craze, he says. Perceive this and it can help make you wealthy. Fail to grasp it and, just like the short sellers who bet against GameStop, you can lose every part.
As a child, Cuban used to attend stamp collecting shows and he shortly realized there was cash to be made from their inefficiencies. As a result of stamp dealers had very different ideas of a stamp’s worth, he might purchase a stamp for 50 cents from one, stroll across the floor and sell it to a different dealer for $25.
These days, digital marketplaces have smoothed out such inefficiencies and buyers and sellers can more quickly agree on an asset’s worth. However that does not imply this value relies on any form of real-world calculation, Cuban says. It is nonetheless just as arbitrary as the price of stamps at his childhood stamp shows, determined solely by what folks believe.
He explains the idea with the term store of value, a financial phrase traditionally used for something that maintains or increases its value over time. Cuban takes a slightly different view. “What is a store of value? It’s something that some number of people assign value to and are willing to pay for and then hold on to, hoping that circumstances increase the value of that item,” he writes
Take gold, which is frequently used to explain the store of value idea. “Gold bugs would tell you that gold is a store of value because of its history as the foundation for currency, or actual use as currency,” Cuban writes. As to the argument that gold has intrinsic value as a result of it’s wanted for manufacturing and jewelry? “It’s all narrative,” Cuban declares. “There are plenty of other ‘precious metals’ that meet the same criteria. But gold has more buyers. There is nothing unique or special about gold other than enough people believe the story to buy gold.”
A Moment worth $71,455.
Things get even more interesting when you think about assets which are purely digital and do not exist in the actual world. A Bitcoin is an instance of a digital retailer of value, Cuban says. So is an NBA Top Shot Moment, a short video clip from a game that has a serial number and is sold for a limited time by the league. Once that time is up, the only way to get it’s in a digital marketplace where fans buy and sell Moments, a lot as they could buy and sell baseball playing cards. Cuban himself has invested in these, and though he would not say he’s made a killing yet, selling them may be very profitable. A Moment featuring LeBron James recently sold for $71,455.
A share in a company can be a digital store of value, Cuban argues. The distinction is that Wall Street has always been “100 percent top down controlled,” he writes. “Big brokerages get to have calls and put out notes to their millions of clients with price tags in the hopes of moving markets but think it’s wrong for subreddits to do the same?”
As with gold, the notion that share prices are based on some logical calculation of intrinsic value is only a delusion, he says, and he might have some extent. If share values really did relate to something real and intrinsic that may very well be measured, their costs would behave in far more rational and predictable ways than they really do. Hedge fund managers — who are definitely smart enough to do these measurements or to hire individuals who can — would outperform the S&P 500 over time, rather than underperforming it, as a ten-year Warren Buffett bet easily proved.
The members of the Reddit group (or “subreddit”) WallStreetBets who drove up GameStop’s price understand perfectly well that a company’s share price is narrative-based, Cuban writes. “This generation doesn’t care what Old School Wall Street thinks or says about valuations. They don’t care about price-to-earnings ratios, or NPV [net present value].” As an alternative, he says, they’ve watched for years as Wall Street rewards these with the most money and small investors get shafted. “These narratives are just sales pitches designed to sell stocks and they want to change the game and kick [Wall Street’s] ass. Which they should and have every right to.”
When a lot of small small investors band together, they’re incredibly powerful, as the GameStop run-up proved. As they proceed to work collectively, Cuban writes, they are going to have an increasing number of power to turn the tables and profit from financial markets which have become slower, more set in their ways, and more susceptible than anyone ever anticipated.
Self-fulfilling prophecy vs. self-fulfilling prophecy.
There is a lesson right here to your personal business and investments, and for the products your organization sells. Do not be fooled into thinking that the worth of any merchandise relies on something aside from the narrative around it and what folks believe about it. The narrative that drove up the price of GameStop was that if WallStreetBets buyers bought enough of it, the short sellers can be pressured to purchase as well, which might drive the worth up even additional, at least for some time. That narrative was true only because it was a self-fulfilling prophecy.
However the hedge fund managers’ narrative that GameStop was doomed was also supposed to be a self-fulfilling prophecy. GameStop might have been suffering losses from its bricks-and-mortar operation, however it was swiftly closing its physical shops and beefing up its on-line presence, and had recently added Chewy founder Ryan Cohen to its board, which implies there was and is at least a reasonable hope that the company will turn itself around. The only real reason to assume GameStop was on the brink of failure was that the hedge fund managers said it was.
In different words, Cuban is right. Good or bad, up or down, it all comes right down to the narrative, to which story people most consider. Find a way to control the narrative, and you’ll pretty much control the world.