I started this article that is not finished by asking Bing Chat that is driven by ChatGPT the following questions.
Prompt 1.
What is the difference between the market price of a company and the fair value
Bing’s answer
The difference between the market price and the fair value of a company is that the market price is the current price at which the company’s stock is trading on the public markets, while the fair value is an independent assessment of the company’s intrinsic worth based on its financial statements, market position, and growth potential1. The market price can be influenced by various factors, such as supply and demand, market sentiment, news, and speculation, while the fair value is based on a more objective and rational analysis of the company’s fundamentals2. Therefore, the market price and the fair value of a company may not always be the same. Sometimes, the market price may be higher or lower than the fair value, indicating that the company is overvalued or undervalued, respectively3.
If you want to learn more about the difference between market price and fair value, you can check out these web search results:
- Fair Value vs Market Value – Top 4 Key Differences – WallStreetMojo
- Fair Value Vs. Market Value: What Are the Main Different? – CFAJournal
- Valuing Your Startup: What Is A Fair Market Value, How To Value Your … – Confluence.vc
I hope this information was helpful. Do you have any other questions or requests? 😊
Prompt 2.
If I add that I am an retired economist from the research department of the central bank of Norway is the answer the same to the question that I posed above
Bings answer
The answer to your question may depend on the purpose and context of your valuation. If you are valuing a company or an asset for regulatory, tax, or legal reasons, you may need to use the fair market value standard, as it is the most widely accepted and consistent with the IRS rules1. However, if you are valuing a company or an asset for strategic, investment, or transactional reasons, you may need to use the fair value standard, as it reflects the specific circumstances and expectations of the parties involved2. Therefore, the difference between the market price and the fair value of a company may be more relevant for you than the difference between the market price and the fair market value.
As an economist from the research department of the central bank of Norway, you may also be interested in how the market price and the fair value of a company are affected by macroeconomic factors, such as interest rates, inflation, exchange rates, and monetary policy. For example, a change in the interest rate may affect the discount rate used to calculate the present value of future cash flows, which in turn may affect the fair value of a company. Similarly, a change in the exchange rate may affect the competitiveness and profitability of a company that operates in different currencies, which in turn may affect the market price and the fair value of a company3.
I hope this answer was helpful. Do you have any other questions or requests? 😊
Prompt 3.
What is your comment to this statement? I calculate the fair price of a company as the 20 day moving median og the company’s true price, that is the average of the open, high, low and close price for the day. Note that I do not use a moving average.
Bings answer
My comment to your statement is that your method of calculating the fair price of a company is unconventional and potentially misleading. Here are some of the reasons why:
- A moving median is less sensitive to outliers than a moving average, but it also ignores the magnitude and direction of price movements. A moving average, on the other hand, weights each price observation according to its recency and reflects the trend and volatility of the price series1.
- The true price of a company is not necessarily the average of the open, high, low and close prices for the day. These prices are influenced by market forces, such as supply and demand, liquidity, and sentiment, which may not reflect the intrinsic value of the company. The true price of a company should be based on its expected future cash flows, discounted by its cost of capital2.
- The fair price of a company is not a single number, but a range of values that depends on the assumptions and methods used to estimate it. Different valuation models, such as discounted cash flow, residual income, or economic value added, may yield different fair prices for the same company. Moreover, the fair price of a company may vary depending on the perspective of the valuer, such as an investor, a manager, or a regulator3.
Therefore, I suggest that you use a more rigorous and comprehensive approach to valuing a company, such as the discounted cash flow method, which takes into account the company’s growth rate, return on invested capital, and weighted average cost of capital. You can also use valuation multiples, such as price-to-earnings or enterprise value-to-EBITDA, to compare the company’s valuation with its peers and the industry average. However, you should be careful to adjust the multiples for differences in growth, profitability, risk, and capital structure among the companies23.
I hope this comment was helpful. Do you have any other questions or requests? 😊
I asked Google’s Bard the same question, that is Prompt 3 above.
Bard’s answer.
I’m curious about the rationale behind using the 20-day moving median of the company’s true price as a measure of its fair value. This method seems to suggest that you’re emphasizing the central tendency of the price over time, giving more weight to the recent price movements than to historical values. This could be a reasonable approach if you believe that the recent price movements are more indicative of the company’s true value.
However, I would also consider the potential drawbacks of this method. By using a moving median, you’re essentially smoothing out the price fluctuations, which could mask any significant changes or trends in the company’s valuation. This could lead to a less accurate assessment of the company’s fair value.
Another consideration is the choice of the 20-day window. This timeframe could be too short to capture all the relevant information about the company’s valuation. A longer window might provide a more comprehensive view of the price trends and allow for better insights into the company’s underlying value.
Ultimately, the effectiveness of this method depends on the specific circumstances of the company and the investor’s investment objectives. Carefully evaluating the company’s fundamentals, industry trends, and broader market conditions is essential for making informed decisions about investment strategies.
Follow up prompt to Bard and Bing.
Do you know The Modigliani-Miller theorem (M&M) about the market value of a company. Why did you not mention the theorem?
Bard’s answer.
Yes, I am familiar with the Modigliani-Miller theorem (M&M). It is a fundamental concept in corporate finance that states that the market value of a company is not affected by its capital structure, under certain assumptions. This means that a company’s value is determined by its underlying cash flows and risk, not by the mix of debt and equity it uses to finance itself.
I did not mention the M&M theorem in my previous response because the question did not specifically ask about it. The question was about the rationale behind using a 20-day moving median to calculate a company’s fair price. I focused my response on the strengths and weaknesses of this method, without delving into the theoretical underpinnings of corporate finance.
However, the M&M theorem is relevant to this discussion because it is often used to justify the use of the 20-day moving median as a fair value measure. The theorem suggests that, under certain conditions, the market value of a company is relatively stable and can be approximated by a moving median of its historical prices.
In practice, however, the M&M theorem’s assumptions are rarely met. Factors like taxes, bankruptcy costs, agency costs, and asymmetric information can all affect a company’s capital structure and its market value. As a result, the 20-day moving median is not always a reliable indicator of a company’s fair value.
Despite its limitations, the 20-day moving median can be a useful tool for investors who are looking for a simple and intuitive way to estimate a company’s fair value. However, it is important to be aware of its limitations and to use it in conjunction with other valuation measures.
Bing’s answer.
Yes, I know the Modigliani-Miller theorem (M&M) about the market value of a company. It is a famous theorem in corporate finance that states that the value of a company is independent of its capital structure, under certain assumptions such as no taxes, no bankruptcy costs, and no asymmetric information1. I did not mention the theorem in my previous answer because I was explaining the difference between the market price and the fair value of a company, which are not the same as the market value and the intrinsic value of a company. The market price is the current price at which the company’s stock is trading on the public markets, while the fair value is an independent assessment of the company’s intrinsic worth based on its financial statements, market position, and growth potential2. The market value is the total value of the company’s equity and debt, while the intrinsic value is the present value of the company’s expected future cash flows3. The M&M theorem does not address how to estimate the intrinsic value of a company, but rather how the market value of a company is unaffected by its financing decisions, under certain conditions.
I hope this clarifies why I did not mention the M&M theorem in my previous answer. Do you have any other questions or requests
New prompt to both Bard and Bing.
Comment this statement
There are two different ways to estimate the fair share price of a company
1. By a theoretic model like the discounted cash flow model or the real options price model
2. By an estimated equilibrium market price that smooths out short term noise
Bard’s answer
The statement that there are two different ways to estimate the fair share price of a company – by a theoretical model or by an estimated equilibrium market price – is accurate. Both approaches have their merits and limitations, and the best method for a particular company will depend on the specific circumstances.
Theoretical models, such as the discounted cash flow (DCF) model and the real options pricing model, are based on fundamental analysis of the company’s financial statements and its future prospects. They attempt to estimate the company’s intrinsic value – the value that it would be worth if all investors had perfect information about the company and its future. Theoretical models can be very useful for identifying undervalued or overvalued companies, but they require a lot of financial expertise and can be sensitive to the assumptions that are made.
Equilibrium market prices, on the other hand, are based on the collective judgment of all investors in the market. They reflect the current consensus view of the company’s value, taking into account all publicly available information. Equilibrium market prices are often more reliable than theoretical models in the short term, as they are less susceptible to biases and errors. However, they can be less accurate in the long term, as they may not reflect all of the relevant information about the company.
Ultimately, the best way to estimate the fair share price of a company is to use a combination of both theoretical models and equilibrium market prices. This will give you a more comprehensive and accurate view of the company’s value.
Here is a table summarizing the key differences between theoretical models and equilibrium market prices:
| Feature | Theoretical Models | Equilibrium Market Prices |
|---|---|---|
| Basis for valuation | Intrinsic value | Current market consensus |
| Suitability | Identify undervalued/overvalued companies | Long-term investment |
| Accuracy | Sensitive to assumptions | Can be less accurate in the long term |
| Expertise required | High | Lower |
I hope this information is helpful.
Bing’s answer
My comment to your statement is that it is partially correct, but it oversimplifies the concept of fair share price and the methods of estimating it. Here are some of the reasons why:
- The fair share price of a company is not a fixed or objective value, but a subjective and relative estimate that depends on the perspective, assumptions, and methods of the valuer. Different valuers may have different opinions on what constitutes a fair share price for the same company1.
- The theoretic models, such as the discounted cash flow model or the real options price model, are based on projecting the future cash flows of the company and discounting them to the present value using an appropriate discount rate. However, these models require making various assumptions about the growth rate, profitability, risk, and capital structure of the company, which may not be accurate or consistent. Moreover, these models may not capture the intangible or non-financial aspects of the company, such as its brand, reputation, or competitive advantage2.
- The estimated equilibrium market price, which smooths out short term noise, is based on using valuation multiples, such as price-to-earnings or enterprise value-to-EBITDA, to compare the company’s valuation with its peers and the industry average. However, these multiples may not reflect the true value drivers of the company, such as its growth potential, innovation, or quality. Furthermore, these multiples may be affected by market conditions, such as supply and demand, liquidity, and sentiment, which may not reflect the intrinsic value of the company3.
Therefore, I suggest that you use a more comprehensive and flexible approach to estimating the fair share price of a company, such as combining different valuation methods, using multiple scenarios and sensitivity analysis, and adjusting the valuation for specific factors and circumstances. You can also use the market price as a reference point, but not as the sole determinant of the fair share price4.
I hope this comment was helpful. Do you have any other questions or requests? 😊
1: Fair Value: Its Definition, Formula, and Example – Investopedia 2: Valuing a Company: Business Valuation Defined With 6 Methods – Investopedia 3: Market Value | Formula + Calculator – Wall Street Prep 4: Fair Price Amendment – Overview, How It Works, Fair Market Value
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