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What this says to me is that the stock asset class is broken. The value of a stock is supposed to be the amount of earnings you are expected to receive from it

by Taek 10y ago

What this says to me is that the stock asset class is broken. The value of a stock is supposed to be the amount of earnings you are expected to receive from it over its lifetime (adjusted according to the risk free rate or whatever). But today a stock's value can be influenced by a cool factor. Stocks that never pay any earnings can have high values (Amazon) and investor mania can out-live any attempted short. There has to be a better way to set up the market. What if stock had an expiration, after which you had to buy it again? And what if, when you short a stock, you get the full face value of the stock and then only have to pay the owner the earnings? Since the stock expires, you don't have to worry about covering both the earnings and the stock price, only the actual earnings. I think the result would be pricings that more accurately represented a company's earnings potential.

rcMgD2BwE72F 10y ago
> the value of a stock is supposed to be the amount of earnings you are expected to receive from it over its lifetime Who supposes that? I don't and I'm ready to pay a different price that you'd do. If there isn't a good reason for that, you might be able to take advantage from my position. Now, there are many reasons why I wouldn't price a stock as the sum of its (future) earnings. For instance, a company can be acquired by another and makes a very different business in the combined configuration. Moreover, the acquirer could use the merger to prevent a competitor to enter a very profitable market. Why would you care about the performance of the acquired company if it remained independent? There's no way to estimate the future earnings of a company without knowing all the possible strategic configurations. Growth stocks are bought for potential capital gains, not dividends. (Market) power is much more important than earnings you can forecast. I'm a Tesla shareholder (the stock makes over 90% of my financial assets) and I don't expect a buck of dividend from this company. I intend to keep the stock for ~20 years, which I bought at $25 avg.
- mcguire 10y ago
  The alternative to valuing a stock as the current value of its net future dividends (not future revenue; as a stockholder, you have no claim on revenue) is the greater fool theory. Greater fool theory has some problems. For one, it's not economically rational.
- Taek 10y ago
  All companies eventually die. Sometimes this can take hundreds of years, but all companies do eventually die. At that point, the stock is worth zero. So if all stock is eventually worth zero, why pay for any of it today? Well, you may want voting rights. But voting rights don't mean much unless you hold a lot of stock, and a lot of stock is non-voting anyway. That leaves dividends and exits. An exit depends on someone having a value for the company, and can almost be looked at as a 'final dividend'. So I would essentially boil the value of most stock down to purely dividends. If you buy it for any other reason, you are hoping that some other person will be willing to buy it from you later. Which means that other person needs a reason (voting power, dividends, or some other business move with external benefits). But my appraisal is that many stocks exist today that have value simply because people think that other people will want the stock. It's inefficient, and at the moment of exit (death also counts as exit here) someone is left holding a bunch of stock that's worth less than what they bought it for.
clock_tower 10y ago
Markets are irrational and always have been, and the cool factor has been around since at least the 1920s. You sound like you could be an extremely capable investor; disillusionment is a really good starting point. The next step, if you're interested, is reading The Money Game by 'Adam Smith', which was written in the 1960s but reads like a description of the 2000s... I also recommend 1929: The Year of the Great Crash, although I forget the author at the moment.

by Taek 10y ago

rcMgD2BwE72F 10y ago

> the value of a stock is supposed to be the amount of earnings you are expected to receive from it over its lifetime Who supposes that? I don't and I'm ready to pay a different price that you'd do. If there isn't a good reason for that, you might be able to take advantage from my position. Now, there are many reasons why I wouldn't price a stock as the sum of its (future) earnings. For instance, a company can be acquired by another and makes a very different business in the combined configuration. Moreover, the acquirer could use the merger to prevent a competitor to enter a very profitable market. Why would you care about the performance of the acquired company if it remained independent? There's no way to estimate the future earnings of a company without knowing all the possible strategic configurations. Growth stocks are bought for potential capital gains, not dividends. (Market) power is much more important than earnings you can forecast. I'm a Tesla shareholder (the stock makes over 90% of my financial assets) and I don't expect a buck of dividend from this company. I intend to keep the stock for ~20 years, which I bought at $25 avg.

mcguire 10y ago
The alternative to valuing a stock as the current value of its net future dividends (not future revenue; as a stockholder, you have no claim on revenue) is the greater fool theory. Greater fool theory has some problems. For one, it's not economically rational.
Taek 10y ago
All companies eventually die. Sometimes this can take hundreds of years, but all companies do eventually die. At that point, the stock is worth zero. So if all stock is eventually worth zero, why pay for any of it today? Well, you may want voting rights. But voting rights don't mean much unless you hold a lot of stock, and a lot of stock is non-voting anyway. That leaves dividends and exits. An exit depends on someone having a value for the company, and can almost be looked at as a 'final dividend'. So I would essentially boil the value of most stock down to purely dividends. If you buy it for any other reason, you are hoping that some other person will be willing to buy it from you later. Which means that other person needs a reason (voting power, dividends, or some other business move with external benefits). But my appraisal is that many stocks exist today that have value simply because people think that other people will want the stock. It's inefficient, and at the moment of exit (death also counts as exit here) someone is left holding a bunch of stock that's worth less than what they bought it for.

clock_tower 10y ago

Markets are irrational and always have been, and the cool factor has been around since at least the 1920s. You sound like you could be an extremely capable investor; disillusionment is a really good starting point. The next step, if you're interested, is reading The Money Game by 'Adam Smith', which was written in the 1960s but reads like a description of the 2000s... I also recommend 1929: The Year of the Great Crash, although I forget the author at the moment.