What can you learn from Bitcoin, GameStop, and Tesla stock?
Bitcoin price has been going up like there is no tomorrow. Financial experts have opined that Bitcoin has no intrinsic value—it is just a fad.
A group of nerds in a Reddit forum got together and drove up a lumbering video game retailer’s stock price by buying the stock in a frenzy. They did it partly in jest and partly as socking it to the man. Institutional investors were betting on the retailer’s stock price going down and got caught in the mêlée.
Telsa stock seems to be on the same trajectory as Elon Musk’s rockets. At one point, Tesla’s value was more than the combined worth of all the prominent car manufacturers in the world put together. Many believe Tesla stock is overvalued.
What is the lesson in all of this?
The right price for anything is what the market is willing to pay for it. The question that you need to concern yourself with is—are you comfortable paying that price?
Long ago, I had the snobbish view on Bangalore’s real estate prices—it is way too overvalued. Now, I say, I am not comfortable paying that price. Do you see the subtle difference? Who am I to decide what should be the right price of real estate in Bangalore? Someone is willing to pay; that is why it commands that price. All I can do is decide whether I am comfortable paying that price or not.
In Sapiens, Yuval Harari talks about how societal constructs are about the stories we collectively believe. Concepts like money, corporation, human rights, and religion are tales we all choose to believe. Since all of us(a majority at least) believe in these stories, they exist.
The same can be said of value too. If a majority of the people believe that a commodity commands a value X, then it does. What you can do is—you can independently come up with a value based on rational reasoning(as per you) or a story that only you believe at this point in time. You can hope that, over time, people will come to the same rational conclusion as you, and the value would converge to the price you believe is the right one. A key point to stress here is that this assumption hinges on the fact that people will think rationally, and eventually, they too will believe in the story that you believe in right now. If that does not happen (or your thesis on the value was wrong to start with), you have to be comfortable not owning that commodity. If you still want to own it, you might have to pay a higher price(as price appreciates over time as more people buy into the story)—that is the cost of your conviction.
There is a saying in the stock market—markets can remain irrational for longer than you can remain solvent.