3 ms·

My go-to perspective whenever these kinds of headlines come up: ------------------ "Suppose you’re just starting out as an egg farmer, and your goal is to bui

by _bxg1 7y ago

My go-to perspective whenever these kinds of headlines come up: ------------------ "Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!” Is this a sensible way to think about it? No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster. Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks. Some younger companies don’t pay dividends, but that doesn’t mean they aren’t making you money – they are just reinvesting their profits to grow even faster – and eventually become a Super Hen. There’s only one time you care if one of your shares is down: on the day you sell it." https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/ https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-... ------------------ Unless you're actively playing the markets, or close to retirement, there's nothing really to worry about.

bfieidhbrjr 7y ago
I'm a big fan of MMM however a better analogy would be a disease comes through that makes all the eggs 50% smaller, or leads to 50% infertility. MMMs analogies tend to assume you're independently financially secure, which is his whole schtick. I love it. But there are people who'll lose their jobs and house in a recession and need to draw down their stock at the worst possible time, not leave it sitting there as the analogy implies.
- jotto 7y ago
  Such a politely written counterargument.
- deleted 7y ago
  [deleted]
- chii 7y ago
  > need to draw down their stock at the worst possible time then they're over invested! If they don't have spare money to invest, they shouldn't be. If you lose your job and have to sell stocks to pay rent, then that money shouldn't have been in stocks in the first place. The stock market isn't a place to park emergency money. It's a place you put money _after_ you've paid for necessities and topped up emergency reserves, in the hopes of getting a greater return.
  - _bxg1 7y ago
    I do think there's still something to be said against the "there's nothing to worry about", which is that people do lose jobs and experience other repercussions during a recession. It's only in the case of investing - and prudent investing, at that - where there's nothing to worry about.
chii 7y ago
> They lay eggs called “dividends” only if the hen is actually laying! What if farmer Joe called you up, and told you that people are selling their hens because there's a hen disease going around, and making hens stop laying eggs (at least temporarily). Keeping hens isn't free, so you too, can decide to sell. But may be only hens that have the propensity to catch the disease - some hens are strong and lay eggs. The analogy isn't, and only serves to illustrate one point of view. The fact that people _are_ selling, is saying something.
- _bxg1 7y ago
  He points out elsewhere that dividends tend to remain steady even when the market goes up and down.
  - chii 7y ago
    during 2008, many companies cut dividends. The reason sometimes dividends don't get cut even if the market goes up or down has more to do with the real economy - but presumably discretionary spending related businesses would get hit during a virus induced recession, but essential goods related companies would continue to do OK.
seanmcdirmid 7y ago
I hate this analogy because those farmers are just as likely to go bust due to a crash in the price of eggs. If I bought GE at 40 in 2005....well, I’m probably going to take a loss regardless.
- _bxg1 7y ago
  It's only talking about the market as a whole. The market as a whole will go up in the long run. Individual stocks are a different story.
  - seanmcdirmid 7y ago
    But that farmer was putting all his eggs in one basket (excuse the pun), and, anyways, they aren’t going to realize long term gains in the egg market before the bank forecloses on their farm because they can’t make payments on the loan they used to buy those chickens in the first place.
    - _bxg1 7y ago
      Who in the world is making payments on a loan they used to buy stocks?
      - seanmcdirmid 7y ago
        Anyone who is trading with leverage. Think about it: the market is (or was) not, and interest rates are super low. You’d be an idiot to not think that more than a few people are going to try and take advantage of that.
JumpCrisscross 7y ago
> You’re happy that hens are cheaper, because now you can build your egg business even faster And so can your competitors. Except each dollar they spend buys them twice the number of chickens. Which means they’ll require twice the amount of certain equipment, which is likely to drive those prices up in the short term. They can also sell their eggs at a lower cost than you. Perhaps lower than you can afford. Capital costs for an operating business matter. Ironically, they matter less for non-professional investors. For an investor, both obsessing over and ignoring market signals is a bad strategy. The market may be pricing in new information. Or it might be safe to ignore.
- _bxg1 7y ago
  My index fund (or well-diversified, medium-long-term portfolio) is not in a competitive relationship with other index funds. That's not how that works.
shoo 7y ago
This is a bit hazier when we focus on some more detailed points: when a stock pays out some amount of dividend, the price per share of the stock is adjusted downwards by the same amount to reflect that cash has been lost from the company coffers; dividends are often inferior from a tax perspective to capital gains: some companies have a policy of not paying dividends at all! Due to tax disadvantages, many investors these days might prefer not to be paid dividends and prefer to receive gains as capital appreciation when they sell off some or all stock. Also, from a control perspective, a minority shareholder is nothing remotely like the same thing as the sole owner operator of a chicken farm. There's a trend in recent years where some stocks of large profitable companies do not pay dividends. Some of these stocks even have weird voting right structures that reduces the voting power of shares sold to public investors compared to founders, etc. These stocks are arguably worthless from a "buy a piece of the business and hold it forever" perspective of a minority investor: if the company policy is not to pay dividends, and you are a minority shareholder with no voting rights, the only reasonable foundation you have for a nonzero valuation of the share is that "maybe someone else will value it, and I can sell it to them at some future point in time". If you buy and hold you will receive no dividends and not be able to influence the decisions of the company. This situation is maybe easier to think about in the situation where you are a minority shareholder in a company, and there is a powerful majority shareholder who is not interested in the interests of minority shareholders, and may be able to use that control to extract profit from the business in a way that is not proportionally shared with minor share holders. In such situations the value of a share to a minority shareholder could be dramatically lower than in a different scenario with a different control structure.

by _bxg1 7y ago

bfieidhbrjr 7y ago

I'm a big fan of MMM however a better analogy would be a disease comes through that makes all the eggs 50% smaller, or leads to 50% infertility. MMMs analogies tend to assume you're independently financially secure, which is his whole schtick. I love it. But there are people who'll lose their jobs and house in a recession and need to draw down their stock at the worst possible time, not leave it sitting there as the analogy implies.

jotto 7y ago
Such a politely written counterargument.
deleted 7y ago
[deleted]
chii 7y ago
> need to draw down their stock at the worst possible time then they're over invested! If they don't have spare money to invest, they shouldn't be. If you lose your job and have to sell stocks to pay rent, then that money shouldn't have been in stocks in the first place. The stock market isn't a place to park emergency money. It's a place you put money _after_ you've paid for necessities and topped up emergency reserves, in the hopes of getting a greater return.
- _bxg1 7y ago
  I do think there's still something to be said against the "there's nothing to worry about", which is that people do lose jobs and experience other repercussions during a recession. It's only in the case of investing - and prudent investing, at that - where there's nothing to worry about.

chii 7y ago

> They lay eggs called “dividends” only if the hen is actually laying! What if farmer Joe called you up, and told you that people are selling their hens because there's a hen disease going around, and making hens stop laying eggs (at least temporarily). Keeping hens isn't free, so you too, can decide to sell. But may be only hens that have the propensity to catch the disease - some hens are strong and lay eggs. The analogy isn't, and only serves to illustrate one point of view. The fact that people _are_ selling, is saying something.

_bxg1 7y ago
He points out elsewhere that dividends tend to remain steady even when the market goes up and down.
- chii 7y ago
  during 2008, many companies cut dividends. The reason sometimes dividends don't get cut even if the market goes up or down has more to do with the real economy - but presumably discretionary spending related businesses would get hit during a virus induced recession, but essential goods related companies would continue to do OK.

seanmcdirmid 7y ago

I hate this analogy because those farmers are just as likely to go bust due to a crash in the price of eggs. If I bought GE at 40 in 2005....well, I’m probably going to take a loss regardless.

_bxg1 7y ago
It's only talking about the market as a whole. The market as a whole will go up in the long run. Individual stocks are a different story.
- seanmcdirmid 7y ago
  But that farmer was putting all his eggs in one basket (excuse the pun), and, anyways, they aren’t going to realize long term gains in the egg market before the bank forecloses on their farm because they can’t make payments on the loan they used to buy those chickens in the first place.
  - _bxg1 7y ago
    Who in the world is making payments on a loan they used to buy stocks?
    - seanmcdirmid 7y ago
      Anyone who is trading with leverage. Think about it: the market is (or was) not, and interest rates are super low. You’d be an idiot to not think that more than a few people are going to try and take advantage of that.

JumpCrisscross 7y ago

> You’re happy that hens are cheaper, because now you can build your egg business even faster And so can your competitors. Except each dollar they spend buys them twice the number of chickens. Which means they’ll require twice the amount of certain equipment, which is likely to drive those prices up in the short term. They can also sell their eggs at a lower cost than you. Perhaps lower than you can afford. Capital costs for an operating business matter. Ironically, they matter less for non-professional investors. For an investor, both obsessing over and ignoring market signals is a bad strategy. The market may be pricing in new information. Or it might be safe to ignore.

_bxg1 7y ago
My index fund (or well-diversified, medium-long-term portfolio) is not in a competitive relationship with other index funds. That's not how that works.

shoo 7y ago

This is a bit hazier when we focus on some more detailed points: when a stock pays out some amount of dividend, the price per share of the stock is adjusted downwards by the same amount to reflect that cash has been lost from the company coffers; dividends are often inferior from a tax perspective to capital gains: some companies have a policy of not paying dividends at all! Due to tax disadvantages, many investors these days might prefer not to be paid dividends and prefer to receive gains as capital appreciation when they sell off some or all stock. Also, from a control perspective, a minority shareholder is nothing remotely like the same thing as the sole owner operator of a chicken farm. There's a trend in recent years where some stocks of large profitable companies do not pay dividends. Some of these stocks even have weird voting right structures that reduces the voting power of shares sold to public investors compared to founders, etc. These stocks are arguably worthless from a "buy a piece of the business and hold it forever" perspective of a minority investor: if the company policy is not to pay dividends, and you are a minority shareholder with no voting rights, the only reasonable foundation you have for a nonzero valuation of the share is that "maybe someone else will value it, and I can sell it to them at some future point in time". If you buy and hold you will receive no dividends and not be able to influence the decisions of the company. This situation is maybe easier to think about in the situation where you are a minority shareholder in a company, and there is a powerful majority shareholder who is not interested in the interests of minority shareholders, and may be able to use that control to extract profit from the business in a way that is not proportionally shared with minor share holders. In such situations the value of a share to a minority shareholder could be dramatically lower than in a different scenario with a different control structure.