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What do investors mean by "intrinsic" value?
A reader writes: What do investors mean by “intrinsic value”?
Archer replies: So an NFT (non-fungible token) of Twitter (now X) founder’s Jack Dorsey’s first tweet once sold for $2.9 million. The tweet was posted on March 21, 2006; it was purchased on March 5, 2021, by Iranian investor Sina Estavi. In a real world test of the greater fool theory, the new owner soon put it back on the market, asking $48 million. That didn’t quite pan out; more recently, it went for less than $4.
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This variation in price represents what? A change in the market? Supply and demand? Twitter’s name change? The ongoing debate over the “intrinsic value” of a digital asset? Of any asset? On the existential level, this is perhaps unknowable, but most people don’t live on a purely existential level. More practically, it’s simple: like everything else NFTs and other digital properties are worth what someone will pay for them.
There is, perforce, a behavioral component to any buy & sell transaction, and that will influence price. By definition, behavioral economics is the study of what people actually do as compared to what they should do, if they were continually acting in their own presumed best interests. Many reasons are offered for this confounding behavior. They include the “availability heuristic” – that people tend to overweight recent and easily available information when making decisions; “bounded rationality” – that we can only bring so much information to bear when making a decision; and, “bounded willpower” – that even knowing the optimal choice, we will sometimes act otherwise if we believe it to be in our short-term interest.
There is nothing particularly novel about any of this. The Nobel Prize-winning genius of the behavioral theorists has been to codify these ideas and cloak them in pseudo-scientific mumbo-jumbo. That people see things differently is a given. “He thought we were in a LeCarre novel, but I knew we were in a Beckett play,” an old teacher of mine once told The Wall Street Journal about a nighttime adventure on a deserted runway somewhere in South Florida. He had left teaching, gone into political consulting, and he and his colleague were waiting for a plane. Their reasons for being there were somewhat obscure.
Add to this inevitable difference in perspectives the truism that value is frequently reassessed over time, the fourth dimension of security analysis. Maybe you think the value assigned to Dorsey’s tweet at the time of its initial purchase reflected the sum total of human knowledge at that moment. Maybe you think it was nuts. In fact, it has been effectively priced using both metrics, first the one then the other.
The truth is that the analogue world is receding from us into a digital cloud where reality is infinitely more malleable. But digital or analogue, value tends to be relative, meaningful mostly in relation to something else. For investors, that’s true whether your favorite metric is earnings per share, free cash flow, price momentum, or a yardstick popularized during the early days of the dot-com era, “eyeballs.”
There is also, of course, also the question of what you choose to value, with everything from gold and dollars to NFTs, bitcoins, and sneakers now acting as a potential store of wealth, and each with its own relative measures of worth.
It can all be a little boggling. As such, it might be best to just let markets be markets, and shift the search for what is truly valuable, “intrinsically” or otherwise, to other venues.