Every now and then its good to come across a reminder that some people do not understand the way markets work. Today we came across this little beauty from Mike Kinsley, who thinks he's proved that the stock market is irrational because, well, let's let Mike explain:
So, free-market capitalism has decreed three different values for this company. One is set by the stock market: the value of all the company's outstanding shares or "market capitalization." One is what the private investors are offering—usually a bit more than the market cap. And one is what the private investors sell the company for a blink of an eye later—which is usually a lot more than the other two. Which of these numbers is the true capitalist price? Which one represents the most sublime interaction of supply and demand? Anyone? Anyone?
Okay. Here's the thing, Mike. There are actually a lot more prices than you've listed here. Every time a stock trades hands it's because two individuals or institutions have a disagreement on its price value. Each day a stock trading on an exchange may have hundreds or thousands of prices. In fact, all free market exchanges represent the trading of goods of unequal value to the parties involved in the exchange. That's why they're trading one for the other. There's no such thing as "the true capitalist price" of anything. What we've got, instead, is the prices people are willing to pay for things, and the prices people are willing to accept to give up those things.
Does that mean that one side of every transaction is wrong and the other is right? Of course not. Different people have different tolerance for risk, different time horizons and different investment goals. The search for the "true capitalist price" assumes a uniformity of market actors that just doesn't match reality.
Update: Ted Frank has a less theoretical critique of the "infuriatingly stupid Kinsley essay":
Michael Kinsley notes that publicly-traded stocks are sometimes bought out and taken private, and that private equity managers sometimes make profit on these deals. He concludes that the free market does not work.
The non sequitur is appalling. It is apparently beyond Kinsley's comprehension that private equity managers could add value to a corporation through better management.
Kinsley acknowledges that private equity managers, by taking a company private, could be increasing the value of a corporation by avoiding the regulatory burdens that accompany public trading, but then again concludes that this shows that the free market can not work, rather than the obvious conclusion that the regulatory constraints on the free market are inefficient and create opportunities for profit through avoidance.
The Free Market Free-for-All [Slate]