Shouldn't all stocks trade at discount to company value?

[Mark1808]

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-liquidity increases a company's value. if you own the whole thing, how are you going to find buyers at the "true value"? if you need to liquidate, the company is only worth what you can sell it for.

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Very valid point IMO... although there might be such a DEMAND for certain isolated illiquid public companies,where they will pay WHATEVER "true value" they want to aquire that entity...even though it may be at a much higher premium to its peers.

In fact in most cases they HAVE to pay higher,just due to the liquidity issues alone in an example like that

SF [img]/images/graemlins/cool.gif[/img]

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The point that has been succesfully contested with the IRS is that if you have control you have the option to sell the whole thing anytime you want, not so for a minority holder. This control premium has value. Would owning 51% of a stock have more value per share then owning 100 shares?

[Phone Booth]

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I'm not sure that having a minority interest provides you with less value. When you buy a stock, you are buying a part of the abilities of the management to direct the activities of the company along with a piece of all its assets, future profits and current cash flows. So in order for a minority interest to be worth less, that would be saying that you could do a better job than the current management, and most investors are not willing to spend the huge amounts of time to run a company, so instead they buy a piece of the company, with one of the intangible assets being managements ability.

I think it might actually be the reverse of what you are saying. The reason you have to pay a premium for getting a majority interest is because to do so you have to bid up the price of a stock by buying over half of it. A controlling interest is worth enough to you--economies of scale, you can use the assets better etc.--to bid up the price of the stock and pay a premium over normal value. The difference between the person taking a controlling interest and the real value is the premium you have to pay and seems to me the discount you would be referring to. So the discount comes out of someone who needs a controlling interest's pocket, not a value investors valuation.

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Minority discount is worth different amounts in different countries, due to laws and regulations in some countries being more shareholder-friendly than others. But that it should exist is fairly obvious. It's not about the competence of the management per se, but rather the possibility that the management would put their own interests over those of minority shareholders.

[DcifrThs]

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Many flavors of EM theory but one thing I believe you didn't mention and that is that mispricings occur at random.

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I've never heard that before, can you shed light on how they arrived at this? To me "at random" sounds like "there are some many influences that create mispricings that we can't figure out what the primary causes are".

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adios was just relaying what EM says. it says that nobody can outperform the market in expectation though some do over periods of time.

those that do have picked securities that have outperformed, but that outperformance was simply a random event and cannot be expected to be repeated over the long run.

basically, all prices are efficient in the sense that any differentiation from "true value" is a random event and normally distributed (i think that is also a requirement though i'm not sure the distribution is explicity stated).

Barron