4 ms·

The stock market is such a bizarre scheme. The current stock price is a bet on the future stock price. But the future stock price will also be a bet on the fart

by _qulr 6y ago

The stock market is such a bizarre scheme. The current stock price is a bet on the future stock price. But the future stock price will also be a bet on the farther future stock price. The price is only ever tenuously attached to current reality.

zeusk 6y ago
the current stock price is a bet on future "earnings" and surrounding fiscal environment (taxes, interest rates, alternate investments). Only thing relating current price to future stock price is the hopes and dreams of speculators.
- gshdg 6y ago
  What percentage of current investment is speculation for share price growth vs for dividends?
user5994461 6y ago
Stock is mainly long term storage for pensions.
eru 6y ago
The orthodox theory is that the stock price reflects the expected value of future cash flow discounted to the present. Ie buybacks, dividends and liquidation are important. Stock prices don't exist in a vacuum.
- coldcode 6y ago
  Don't forget how much money is injected into the system every day by the Fed; it's basically pumping hot air into a balloon. Some modern economists view printing money as a non-issue but I don't think there is any evidence that it's unlimited.
- bryanlarsen 6y ago
  The expected value of future cash flow of SpaceX is likely $0. They've made it quite clear to investors that they will reinvest all profits into colonizing Mars. Yet Google says the valuation of SpaceX is $36 billion.
OmarShehata 6y ago
This may be how most money is made in trading, but it's not exclusively how the value of a stock is determined. The stock for a company that never grows isn't worthless. You still have dividends.
shawnz 6y ago
How is that any different from any other business? You spend money to make more money later, which enables you to spend more money to make even more money. For example if you run a loan business you're making a bet that your customers will repay you on time so you can loan even more to future customers. Buying stock is just like giving loans to corporations.
- _qulr 6y ago
  A loan has a fixed time period, and usually a fixed interest rate too. The monetary value is straightforward. Of course there's a risk you won't get paid back by the debtor, as there's risk in all business. But the monetary value of the payback can't vary wildly based on pure future speculation. A variable interest rate alters the situation, but if interests rates vary wildly during the fixed loan period, you've got an entire economy out of control. In recent years, interest rates have been relatively steady.
  - shawnz 6y ago
    I am not saying all asset classes ought to be as volatile as stocks are. Investors should have choices about the safety of the investments they make.
devxpy 6y ago
Yes. Why we don't use total equity instead of what one investor thinks is a good price of their share, I don't understand.
ghaff 6y ago
It's really no different in principle from coming up with a price for any business that you want to buy or sell. The stock market definitely has a speculative/greater fool theory element to it that buying or selling the local pizza parlor doesn't but it's not fundamentally all that different. It boils down to what do you think the discounted cash flow (after tax) is going to be? Which, with companies, was historically considered to mostly be the net present value of dividends.
- _qulr 6y ago
  It is different in principle, because when you buy a private business, you become the CEO, and you bank the revenue from the business. Neither of those are true when you buy stock in a publicly traded corporation. You may or may not get some dividends, at the discretion of the CEO, who is definitely not you.
  - ghaff 6y ago
    It's more likely to be the board (which probably includes the CEO) that sets dividend policy--and they're elected by the shareholders. Now, in practice, they're effectively selected by some large shareholders and that probably doesn't include you. But that's just saying that, if you have a small ownership stake you don't have a lot of say in how a business manages its cash. It doesn't change the fact that a businesses' valuation should in principle be a function of future cash flows whether those come in the form of dividends, spinoffs, or an eventual purchase. You may think one majority shareholder (including yourself) is better and/or will optimize cash flows closer to what you desire than another. But otherwise it's still the cash flows that ultimately determine the value.
    - _qulr 6y ago
      Let's talk about Tesla, which is basically the topic of the article. Tesla has never paid a dividend, and is unlikely to pay a dividend any time in the foreseeable future, correct? So the entire value of TSLA now is speculation on the future price of TSLA. The shareholders are not actually extracting revenue from the company (which is currently operating at a loss), they just hope to extract revenue from future stock buyers. In effect, the actual cash management is largely irrelevant. All that matters is the perception of future stock buyers about the even farther future cash management of the company. Whereas when you buy a private company, the actual revenue the company makes after the sale does matter crucially. Unless you're just looking to "flip" the company. If you bought TSLA low and sold now, you could make a tidy profit even though Tesla itself never made a profit during the entire time you owned it.
LatteLazy 6y ago
You're not wrong but the same could be said of any non-consuming market. Today's House prices are basically a function of future house prices...
- _qulr 6y ago
  This is not true at all, because you live in the house. The primary value of a house is as a place to live. In fact, some people never sell their house, and live there until they die.
  - LatteLazy 6y ago
    That really depends doesn't it. How many people are so settled in their house they don't care about resale value, even for their eventual heirs?would you buy a house you knew would fall in value?
    - _qulr 6y ago
      I'm not saying resale value is irrelevant. I said the primary value of a house is as a place to live. Whereas the entire value of stock is the monetary return. There's no material value to stock. Stock is not comparable to material products that you can use and then resell, because there's a lot of value in the use.
      - _qulr 6y ago
        Also, the housing market — whether or not a house will appreciate in value — depends a lot on location, but a lot of people lack flexibility in where they can live, because of job, family, etc. You can't pick a house the same way you pick stocks, the constraints are totally different. Not to mention that houses are approximately infinitely less liquid than stocks.

by _qulr 6y ago

zeusk 6y ago

the current stock price is a bet on future "earnings" and surrounding fiscal environment (taxes, interest rates, alternate investments). Only thing relating current price to future stock price is the hopes and dreams of speculators.

gshdg 6y ago
What percentage of current investment is speculation for share price growth vs for dividends?

user5994461 6y ago

Stock is mainly long term storage for pensions.

eru 6y ago

The orthodox theory is that the stock price reflects the expected value of future cash flow discounted to the present. Ie buybacks, dividends and liquidation are important. Stock prices don't exist in a vacuum.

coldcode 6y ago
Don't forget how much money is injected into the system every day by the Fed; it's basically pumping hot air into a balloon. Some modern economists view printing money as a non-issue but I don't think there is any evidence that it's unlimited.
bryanlarsen 6y ago
The expected value of future cash flow of SpaceX is likely $0. They've made it quite clear to investors that they will reinvest all profits into colonizing Mars. Yet Google says the valuation of SpaceX is $36 billion.

OmarShehata 6y ago

This may be how most money is made in trading, but it's not exclusively how the value of a stock is determined. The stock for a company that never grows isn't worthless. You still have dividends.

shawnz 6y ago

How is that any different from any other business? You spend money to make more money later, which enables you to spend more money to make even more money. For example if you run a loan business you're making a bet that your customers will repay you on time so you can loan even more to future customers. Buying stock is just like giving loans to corporations.

_qulr 6y ago
A loan has a fixed time period, and usually a fixed interest rate too. The monetary value is straightforward. Of course there's a risk you won't get paid back by the debtor, as there's risk in all business. But the monetary value of the payback can't vary wildly based on pure future speculation. A variable interest rate alters the situation, but if interests rates vary wildly during the fixed loan period, you've got an entire economy out of control. In recent years, interest rates have been relatively steady.
- shawnz 6y ago
  I am not saying all asset classes ought to be as volatile as stocks are. Investors should have choices about the safety of the investments they make.

devxpy 6y ago

Yes. Why we don't use total equity instead of what one investor thinks is a good price of their share, I don't understand.

ghaff 6y ago

It's really no different in principle from coming up with a price for any business that you want to buy or sell. The stock market definitely has a speculative/greater fool theory element to it that buying or selling the local pizza parlor doesn't but it's not fundamentally all that different. It boils down to what do you think the discounted cash flow (after tax) is going to be? Which, with companies, was historically considered to mostly be the net present value of dividends.

_qulr 6y ago
It is different in principle, because when you buy a private business, you become the CEO, and you bank the revenue from the business. Neither of those are true when you buy stock in a publicly traded corporation. You may or may not get some dividends, at the discretion of the CEO, who is definitely not you.
- ghaff 6y ago
  It's more likely to be the board (which probably includes the CEO) that sets dividend policy--and they're elected by the shareholders. Now, in practice, they're effectively selected by some large shareholders and that probably doesn't include you. But that's just saying that, if you have a small ownership stake you don't have a lot of say in how a business manages its cash. It doesn't change the fact that a businesses' valuation should in principle be a function of future cash flows whether those come in the form of dividends, spinoffs, or an eventual purchase. You may think one majority shareholder (including yourself) is better and/or will optimize cash flows closer to what you desire than another. But otherwise it's still the cash flows that ultimately determine the value.
  - _qulr 6y ago
    Let's talk about Tesla, which is basically the topic of the article. Tesla has never paid a dividend, and is unlikely to pay a dividend any time in the foreseeable future, correct? So the entire value of TSLA now is speculation on the future price of TSLA. The shareholders are not actually extracting revenue from the company (which is currently operating at a loss), they just hope to extract revenue from future stock buyers. In effect, the actual cash management is largely irrelevant. All that matters is the perception of future stock buyers about the even farther future cash management of the company. Whereas when you buy a private company, the actual revenue the company makes after the sale does matter crucially. Unless you're just looking to "flip" the company. If you bought TSLA low and sold now, you could make a tidy profit even though Tesla itself never made a profit during the entire time you owned it.

LatteLazy 6y ago

You're not wrong but the same could be said of any non-consuming market. Today's House prices are basically a function of future house prices...

_qulr 6y ago
This is not true at all, because you live in the house. The primary value of a house is as a place to live. In fact, some people never sell their house, and live there until they die.
- LatteLazy 6y ago
  That really depends doesn't it. How many people are so settled in their house they don't care about resale value, even for their eventual heirs?would you buy a house you knew would fall in value?
  - _qulr 6y ago
    I'm not saying resale value is irrelevant. I said the primary value of a house is as a place to live. Whereas the entire value of stock is the monetary return. There's no material value to stock. Stock is not comparable to material products that you can use and then resell, because there's a lot of value in the use.
    - _qulr 6y ago
      Also, the housing market — whether or not a house will appreciate in value — depends a lot on location, but a lot of people lack flexibility in where they can live, because of job, family, etc. You can't pick a house the same way you pick stocks, the constraints are totally different. Not to mention that houses are approximately infinitely less liquid than stocks.