July 2nd, 2007
|11:11 am - A good example of Irrational Exuberance|
If you thought people who had to get their hands on the first model of the iPhone the moment they were released were a little crazy, that’s nothing compared to stock market investors.
Apple stock has increased 43% since the iPhone was announced on January 9 until its introduction last Friday – that translates to a value of 32 billion dollars.
Apple sold 525,000 iPhones this weekend, and with an average price of $549, that’s $288 million in sales.
But that’s sales only. Apple’s net income on sales last year was 10.3%, so their estimated profit on those iPhones will be $30 million.
Now, granted Apple has other products and profit centers, including computers, iPods, music sales, and battery replacement. But if those only increase at regular levels (or perhaps reduced ones, because of market saturation), Apple will need to sell 559 million more iPhones to be worth the increase in its stock.
That’s almost two iPhones for each man, woman, and child in the U.S.
That's the thing about irrational exuberance -- it's irrational.
I have been thinking about what to say on this point since I read your post this morning.
Obviously, most anyone who claims to be able to accurately predict the future of the market is full of hot air - those who talk about it and those who can really work it are, almost by definition, not the same people. But that's not what you're getting at.
It's a little tricky calling something "irrational" when those involved are putting real money on the line, often for reasons that aren't easy to analyze. You can have a market that is, for various reasons, uncoupled from the fundamental value of the instrument being traded, but where investors are still behaving rationally. So I find myself wondering how exactly that word ought to be defined, and I'm drawing a blank.
If there were evidence that traders were operating on demonstrably unprofitable strategies, that would be a candidate for an irrational market - but that's very hard to assess, since those who do have effective strategies aren't exactly keen to share them. Indeed, in some market systems it's an advantage to appear irrational...
...I really gotta stop reading economics blogs.
Another funny thing about the stock market is that for every one selling shares... there's someone buying them. So any ir/rationality, as evidenced by people voting with their wallets, is essentially moot!