The intrinsic value of anything — a Bitcoin, an ounce of gold, or a share of GameStop — is simply what people believe it is. Nothing else matters, Mark Cuban argues in a recent blog post. That concept is the secret to understanding Bitcoin, stamp collecting, and the recent GameStop craze, he says. Understand this and it can help make you rich. Fail to understand it and, like the short sellers who bet against GameStop, you could lose everything.
As a kid, Cuban used to attend stamp collecting shows and he quickly realized there was money to be made from their inefficiencies. Because stamp dealers had very different ideas of a stamp’s value, he could buy a stamp for 50 cents from one, walk across the floor and sell it to a different dealer for $25.
These days, digital marketplaces have smoothed out such inefficiencies and buyers and sellers can more quickly agree on an asset’s value. But that doesn’t mean this value is based on any kind of real-world calculation, Cuban says. It’s still just as arbitrary as the price of stamps at his childhood stamp shows, determined only by what people believe.
He explains the concept with the term store of value, a financial phrase traditionally used for something that maintains or increases its value over time. Cuban takes a slightly different view. “What is a store of value? It’s something that some number of people assign value to and are willing to pay for and then hold on to, hoping that circumstances increase the value of that item,” he writes
Take gold, which is frequently used to explain the store of value concept. “Gold bugs would tell you that gold is a store of value because of its history as the foundation for currency, or actual use as currency,” Cuban writes. As to the argument that gold has intrinsic value because it is needed for manufacturing and jewelry? “It’s all narrative,” Cuban declares. “There are plenty of other ‘precious metals’ that meet the same criteria. But gold has more buyers. There is nothing unique or special about gold other than enough people believe the story to buy gold.”
A Moment worth $71,455.
Things get even more interesting when you consider assets that are purely digital and don’t exist in the real world. A Bitcoin is an example of a digital store of value, Cuban says. So is an NBA Top Shot Moment, a brief video clip from a game that has a serial number and is sold for a limited time by the league. Once that time is up, the only way to get it is in a digital marketplace where fans buy and sell Moments, much as they might buy and sell baseball cards. Cuban himself has invested in these, and though he doesn’t say he’s made a killing yet, selling them can be very lucrative. A Moment featuring LeBron James recently sold for $71,455.
A share in a company is also a digital store of value, Cuban argues. The difference is that Wall Street has always been “100 percent top down controlled,” he writes. “Big brokerages get to have calls and put out notes to their millions of clients with price tags in the hopes of moving markets but think it’s wrong for subreddits to do the same?”
As with gold, the notion that share prices are based on some logical calculation of intrinsic value is just a myth, he says, and he may have a point. If share values really did relate to something real and intrinsic that could be measured, their prices would behave in much more rational and predictable ways than they actually do. Hedge fund managers — who are certainly smart enough to do these measurements or to hire people who can — would outperform the S&P 500 over time, rather than underperforming it, as a ten-year Warren Buffett bet easily proved.
The members of the Reddit group (or “subreddit”) WallStreetBets who drove up GameStop’s price understand perfectly well that a company’s share price is narrative-based, Cuban writes. “This generation doesn’t care what Old School Wall Street thinks or says about valuations. They don’t care about price-to-earnings ratios, or NPV [net present value].” Instead, he says, they’ve watched for years as Wall Street rewards those with the most money and small investors get shafted. “These narratives are just sales pitches designed to sell stocks and they want to change the game and kick [Wall Street’s] ass. Which they should and have every right to.”
When a large number of small small investors band together, they’re incredibly powerful, as the GameStop run-up proved. As they continue to work together, Cuban writes, they will have more and more power to turn the tables and profit from financial markets that have become slower, more set in their ways, and more vulnerable than anyone ever expected.
Self-fulfilling prophecy vs. self-fulfilling prophecy.
There’s a lesson here for your own business and investments, and for the products your company sells. Don’t be fooled into thinking that the price of any item is based on anything other than the narrative around it and what people believe about it. The narrative that drove up the price of GameStop was that if WallStreetBets buyers bought enough of it, the short sellers would be forced to buy as well, which would drive the price up even further, at least for a while. That narrative was true only because it was a self-fulfilling prophecy.
But the hedge fund managers’ narrative that GameStop was doomed was also supposed to be a self-fulfilling prophecy. GameStop might have been suffering losses from its bricks-and-mortar operation, but it was swiftly closing its physical stores and beefing up its online presence, and had recently added Chewy founder Ryan Cohen to its board, which means there was and is at least a reasonable hope that the company will turn itself around. The only real reason to think GameStop was on the brink of failure was that the hedge fund managers said it was.
In other words, Cuban is right. Good or bad, up or down, it all comes down to the narrative, to which story people most believe. Find a way to control the narrative, and you can pretty much control the world.