xiINTRODUCTION:
THE Q CULTURE
C
ommon sense is the heart of investing and business manage-
ment. Yet the paradox of common sense is that it is so uncom-
mon. For example, people often refer to a stoc kor the mar ket level
as either “overvalued” or “undervalued.” That is an empty statement.
A share of stoc kor the aggregate of all shares in a mar ket index have
an intrinsic value. It is the sum of all future cash flows the share or
the index will generate in the future, discounted to present value.
Estimating that amount of cash flow and its present value are
difficult. But that defines value, and it is the same without regard
to what people hope or guess it is. The result of the hoping and
guessing game—sometimes the product of analysis, often not—is
the share price or market level. Thus, it is more accurate to refer to
a stoc kor a mar ket index as overpricedor underpricedthan as over-
valuedor undervalued.
The insight that prices vary differently from underlying values is
common sense, but it defies prevalent sense. Thin kabout the tic ker
symbol for the popular Nasdaq 100: QQQ. The marketing geniuses
at the National Association of Securities Dealers may have chosen
three Qs because Q is a cool and brandable letter (thin kQ-Tips).
In choosing from the letters N, A, S, D, and Q, however, they se-
lected the one (three times) that stands for Quotation and unwit-
tingly reflect a quote-driven culture by this quintessentially New
Economy index created in mid-1999.
Quotes of prices command constant attention in the mad, mod-
ern market where buyers and sellers of stocks have no idea of the
businesses behind the paper they swap but precisely what the price
is. Quote obsession trades analysis for attitude, minds for myopic
momentum, intelligence for instinct. Quotations are the quotidian
diet of the day trader, forging a casino culture where quickness of
action fed by irrational impulses displaces both quality and quantityCopyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use