Pictures and Attractors
Time-series data are conventionally plotted using simple Cartesian geometry. For example, to plot a time series of a stock's price, price is plotted on the vertical axis and chronological time is plotted on the horizontal axis. In physics, the usual Cartesian graphs can be turned into more powerful pictures called phase portraits plotted in phase space, a presentation that can depict the full range of possibilities for a system. The pendulum is the paradigm for illustrating the differences...
Market Circularity
The greatest deficiency in using market metrics for valuation is the problem of circularity. To say that a share of Exxon-Mobil is worth what the stock last traded for tells you nothing about how that last trade was valued. Of course we know how it was priced by the forces of supply and demand in the stock market. We also know from Part I that those forces are far from rational are infected by emotion, psychology, and noise and may even be chaotic. But that is all we know. None of this tells...
Lessons
The parable of the old man and the tree introduced a number of alternative methods of valuing productive property, whether a single asset or an entire business enterprise. The original 50 bid was based on the tree's salvage value, also sometimes called its scrap value. This valuation method will virtually always be inappropriate for valuing a productive asset, business, or share of stock though many bust-up takeover artists of the 1980s popularized the opposite claim . The 100 bid was based...
Mr Markets Bipolar Disorder
The patient exhibits classic manic depression or bipolar disorder combining episodes of euphoria with irritation. He goes on wild spending sprees for months on end, using money he does not have to buy things he does not need. In the buoyant periods he is talkative and full of ideas, but only in distracted, zigzaggy ways. He can charm you into buying the Brooklyn Bridge. Then, suddenly and swiftly, he shifts moods, falling into a months-long spell of dark depression, often provoked by the...