Let’s say Alice buys 100 shares of Microsoft stock for $100. Then Microsoft implements a new management style that makes them much more effective, doubling the stock price. For emphasis on the new price, Bob then buys 1 share of Microsoft stock for $2. Alice’s shares are now worth $200, but the extra $100 doesn’t seem to have come from someone’s transactions. This $100 would conventionally be considered capital owned by Alice, but the actual substance of this capital is purely based on the new management style of Microsoft, rather than Microsoft’s assets.
I have some big machine (a combine harvester). The machine is worth a lot more than the individual components (gears, screws and so on) that make it up. Similarly, Microsoft is worth more than all the office buildings, patents etc that make it up put together.
So, value is not just in the number of physical things, but in the arrangement of them. I suppose that, ideally, the price difference between a bunch of gears and screws and a combine harvester should be equal to the cost of paying someone to assemble those gears and screws into one. So the price difference between Microsoft the company and all its stuff should be equal to the cost of hiring a bunch of managers to turn a similar amount of stuff into another Microsoft. Put that way ignoring that “arrangement value” does seem a bit artificial.
Alice’ shares have a $200 market price, but the accountants aren’t using that price on the books yet (unless they make a separate move to “mark to market”). Accounting values are not market values. This is one of the major reasons why I have those cautionary notes about accounting conventions throughout the post.
Let’s say Alice buys 100 shares of Microsoft stock for $100. Then Microsoft implements a new management style that makes them much more effective, doubling the stock price. For emphasis on the new price, Bob then buys 1 share of Microsoft stock for $2. Alice’s shares are now worth $200, but the extra $100 doesn’t seem to have come from someone’s transactions. This $100 would conventionally be considered capital owned by Alice, but the actual substance of this capital is purely based on the new management style of Microsoft, rather than Microsoft’s assets.
I have some big machine (a combine harvester). The machine is worth a lot more than the individual components (gears, screws and so on) that make it up. Similarly, Microsoft is worth more than all the office buildings, patents etc that make it up put together.
So, value is not just in the number of physical things, but in the arrangement of them. I suppose that, ideally, the price difference between a bunch of gears and screws and a combine harvester should be equal to the cost of paying someone to assemble those gears and screws into one. So the price difference between Microsoft the company and all its stuff should be equal to the cost of hiring a bunch of managers to turn a similar amount of stuff into another Microsoft. Put that way ignoring that “arrangement value” does seem a bit artificial.
Alice’ shares have a $200 market price, but the accountants aren’t using that price on the books yet (unless they make a separate move to “mark to market”). Accounting values are not market values. This is one of the major reasons why I have those cautionary notes about accounting conventions throughout the post.