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What's the "rational basis" for a specific value of the P/E ratio? There are many stocks that belong to companies that have no mechanisms in place nor could th

by gfodor 9y ago

What's the "rational basis" for a specific value of the P/E ratio? There are many stocks that belong to companies that have no mechanisms in place nor could they be reasonably expected to introduce mechanisms to directly return profits to shareholders. These stocks have the same form of "intrinsic value" as gold or Bitcoin: whatever the hell the next person is willing to pay for it. Pretending that an underlying asset that doesn't throw off any yield or return of capital is somehow more rationally valuable than another doesn't make sense.

FabHK 9y ago
Glad you asked. P/E ratios can be anchored (with expected earnings growth and a risk premium) to interest rates. Whether stocks pay dividends or not is not terribly relevant, see Modigliani-Miller. Thus, share prices are rationally anchored to economic reality. Of course, there's a lot of estimation involved, and people can get it wrong for a while, individually or collectively.
svachalek 9y ago
Even if a stock does not return dividends, it still represents a share of ownership in the company. It has a real value to anyone who might want to purchase a controlling share in the company, value in reasonable proportion to the profit or profit potential of the company. From that perspective, taking control of Bitcoin may have a measurable monetary value but as I understand the system the value isn't in the coins, it's in the miners.
roywiggins 9y ago
Buy enough of the company stock and you own the company. You can't do that with Bitcoin.
imtringued 9y ago
>Pretending that an underlying asset that doesn't throw off any yield or return of capital is somehow more rationally valuable than another doesn't make sense. Lets say I have a company with 1 billion dollar worth of assets and a 100 million dollar profit per year. I have issued 100 million shares during IP. How much is a single share worth? At the very least $10. Next year I have a 1.1 billion dollar company. How much is a single share worth? At the very least $11. You have 1000 shares worth $11000. I can now either pay the profit out as dividend or not. Your shares will be worth less by exactly the amount that was paid out. Your 1000 shares will be worth $10000 and you will have $1000 in cash or alternatively I don't pay out a dividend and you still have 1000 shares worth $11000. Where did that growth come from? With a company it's easy to answer. They sold more of their existing products. Released a new product. Reduced costs through technology. We have more stuff now. Investing in a stock helps a company indirectly even if stock buybacks never happen. The company receives better lending conditions from banks. What about cryptocurrency? A currency shouldn't move in price at all. Where did that growth come from? From other people. Nothing new was created. Existing wealth merely gets redistributed.

by gfodor 9y ago

FabHK 9y ago

Glad you asked. P/E ratios can be anchored (with expected earnings growth and a risk premium) to interest rates. Whether stocks pay dividends or not is not terribly relevant, see Modigliani-Miller. Thus, share prices are rationally anchored to economic reality. Of course, there's a lot of estimation involved, and people can get it wrong for a while, individually or collectively.

svachalek 9y ago

Even if a stock does not return dividends, it still represents a share of ownership in the company. It has a real value to anyone who might want to purchase a controlling share in the company, value in reasonable proportion to the profit or profit potential of the company. From that perspective, taking control of Bitcoin may have a measurable monetary value but as I understand the system the value isn't in the coins, it's in the miners.

roywiggins 9y ago

Buy enough of the company stock and you own the company. You can't do that with Bitcoin.

imtringued 9y ago

>Pretending that an underlying asset that doesn't throw off any yield or return of capital is somehow more rationally valuable than another doesn't make sense. Lets say I have a company with 1 billion dollar worth of assets and a 100 million dollar profit per year. I have issued 100 million shares during IP. How much is a single share worth? At the very least $10. Next year I have a 1.1 billion dollar company. How much is a single share worth? At the very least $11. You have 1000 shares worth $11000. I can now either pay the profit out as dividend or not. Your shares will be worth less by exactly the amount that was paid out. Your 1000 shares will be worth $10000 and you will have $1000 in cash or alternatively I don't pay out a dividend and you still have 1000 shares worth $11000. Where did that growth come from? With a company it's easy to answer. They sold more of their existing products. Released a new product. Reduced costs through technology. We have more stuff now. Investing in a stock helps a company indirectly even if stock buybacks never happen. The company receives better lending conditions from banks. What about cryptocurrency? A currency shouldn't move in price at all. Where did that growth come from? From other people. Nothing new was created. Existing wealth merely gets redistributed.