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Features Determine Value

In every market, buyers determine Value, the sustainable prices for products based on their features.  This phenomenon is never more evident than in stock markets.

Consider the S&P 500 from one day in July 2019, as shown below.  After filtering out those stocks with negative figures for book values, earnings per share, and returns on assets, we have 411 stocks left.

At left, the plane running through the data reveals how the market rewards market capitalization (showing larger companies draw larger prices) and book value per share (how the market rewards a measure of safety if the company were to dissolve), given earnings per share (EPS) of $2.  We could imagine stockholders consider EPS as part of their Value calculation as well, and if we increase it from $2 to $20, as shown at right, we see how the market rewards that feature.

Book value per share, market cap, and earnings per share (with P-values of 0.58%, 1.88E-67, and, 1.17E-11, respectively, where P-values measure the chance a variable contribution is due to chance) are parts of an equation with more contributors to Value as a part of it.

What else might add Value?  Check in to the next post for some answers.

#prices#stocks#value#sustainable#market

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What Holds Up Prices?

Price formation often seems steeped in mystery.  “Seeing what the market will bear” is a mantra for many, but why would we want to leave prices to chance if we could avoid it?

What supported the prices for 2013 electric cars?  As shown below, we could make a statistically significant (9.3E-09) estimate of prices using a surface running through the 18 electric car models (as green spheres) that made up the market that year.  That surface reflects that after buyers paid about $6,500 to enter the market, the Price went up $102 for every horsepower and $172 for every added mile of range (P-Values, 0.00038, 4.19E-07, respectively).  Models priced above the surface may be overpriced, those below may be under-priced, or some other significant Features may be at work.

The diagram & the market math behind it demonstrates the first 2 adages of the Law of Value and Demand, which are:

  1. Product Features (as horsepower, range) determine Value
  2. Value determines Price

The green region is Value Space.  How does it relate to Demand?  Read the next post for an answer.

#prices#value