6 ms·

A few days ago I was discussing the stock market with my mother, who used to be the financial manager for several large companies before she retired. She stated

A few days ago I was discussing the stock market with my mother, who used to be the financial manager for several large companies before she retired. She stated that she's come to believe the speculation of company value is nothing but a pyramid scheme divorced from any actual value of said company. It's an opinion I've heard often from amateur speculators or self-proclaimed experts. It was interesting hearing it from someone I know and trust with serious experience managing the finances of large publicly traded companies.

sseagull 6y ago
Has it always been this way? I’m not that well versed in stock market history, but I hear it claimed that when companies gave out regular dividends, then the stock price would be correlated to (present and future) performance, as that gets reflected in dividend payments. But something tells me that this might be rose-colored glasses, and it has always been a pyramid scheme at some level.
- gruez 6y ago
  > Has it always been this way? I’m not that well versed in stock market history, but I hear it claimed that when companies gave out regular dividends, then the stock price would be correlated to (present and future) performance, as that gets reflected in dividend payments. no, because dividends are equivalent to buybacks.
  - lowpro 6y ago
    That's not true from any perspective. At the end of a buyback the company owns more of its own shares, and investors own less. The company bought something for its money. Dividends are payments to those who own shares, and the company does not own more of anything after a Dividend pay out.
    - gruez 6y ago
      >At the end of a buyback the company owns more of its own shares, and investors own less No, they own the same amount (as a group, proportionally), and each remaining shareholder owns more. Furthermore, the shareholders (as a group that owned the stock before the buyback was done) does get paid, because some of the shareholders sold their stake for cash. >Dividends are payments to those who own shares, and the company does not own more of anything after a Dividend pay out. Dividend payments aren't free. In fact, you can see that for dividend paying stocks, the share price steadily goes in the months leading up to a dividend payment, and on the dividend date it goes down roughly equal to the dividend paid.
      - unkulunkulu 6y ago
        > Dividend payments aren't free. In fact, you can see that for dividend paying stocks, the share price steadily goes in the months leading up to a dividend payment, and on the dividend date it goes down roughly equal to the dividend paid. I thought it was a matter of math: company gave away some amount of money per share so it should have lost exactly that amount in valuation, what’s the catch?
        kgwgk 6y ago
        Taxes are one of the reasons why the decline in price due to the dividend distribution may not be exactly equal to the amount distributed. And of course the decline in price due to the dividend distribution cannot be measured.
        deleted 6y ago
        [deleted]
    - deleted 6y ago
      [deleted]
    - kgwgk 6y ago
      > At the end of a buyback the company owns more of its own shares, and investors own less. The company bought something for its money. Treasury shares can be ignored for most purposes and are often destroyed.
Pokepokalypse 6y ago
That's really what all the "sensible" people (myself included) - were saying back in 1996 when P-E valuations really went off the rails. Yes, there were drops, crashes, and those hurt a lot of people, but in the long run, growth has continued to go up.
- gruez 6y ago
  >were saying back in 1996 when P-E valuations really went off the rails. At least this time around, it's worth noting that money has become much cheaper, which inflates the price of every asset. When that's factored in, the present valuations are actually quite reasonable.
  - tertius 6y ago
    > the present valuations are actually quite reasonable. Any charts to show this?
- triangleman 6y ago
  Yes, in the long run the economy is driven by productivity growth. However there are debt cycles at work: https://economicprinciples.org/ https://economicprinciples.org/ The world may be near the end of a long-term debt cycle, we will have to see. In 1996 PE multiples were indeed high and there was indeed a correction. For instance the Nasdaq went from 1300 at the end of 1996, to over 5000, and back to 1300 in 2002. There was obviously productivity growth over 7 years, but valuations are another thing entirely.
  - habitue 6y ago
    Just a disclaimer for people reading, `economicprinciples.org`, despite having a very official sounding name, is presenting Ray Dalio's theories, not widely held economic principles. None of it seems to me (although I am not an economist), but it should probably be taken with a grain of salt.
gruez 6y ago
>She stated that she's come to believe the speculation of company value is nothing but a pyramid scheme divorced from any actual value of said company. How so? What's the evidence for this, especially when you consider that the company's stock price goes up/down depending on their quarterly performance?
- VBprogrammer 6y ago
  I think some of the recently IPOed tech stocks must be viewed in this light. For example, Deliveroo is basically a platform for skimming off of a market which until recently was mostly people working off books often without the correct insurance. They have undoubtedly unlocked some value in the system by allowing us to order from places which didn't previously provide that service (e.g McDonalds). But whether this justifies a £7bn valuation, I'm not convinced. I think so far investors have been lucky with some of the tech companies which have IPOed and then proven that they do have the potential to generate a profit. I don't think it will take too many of these unicorns to IPO and fail before the blood bath in the "tech" industry begins.

sseagull 6y ago

Has it always been this way? I’m not that well versed in stock market history, but I hear it claimed that when companies gave out regular dividends, then the stock price would be correlated to (present and future) performance, as that gets reflected in dividend payments. But something tells me that this might be rose-colored glasses, and it has always been a pyramid scheme at some level.

gruez 6y ago
> Has it always been this way? I’m not that well versed in stock market history, but I hear it claimed that when companies gave out regular dividends, then the stock price would be correlated to (present and future) performance, as that gets reflected in dividend payments. no, because dividends are equivalent to buybacks.
- lowpro 6y ago
  That's not true from any perspective. At the end of a buyback the company owns more of its own shares, and investors own less. The company bought something for its money. Dividends are payments to those who own shares, and the company does not own more of anything after a Dividend pay out.
  - gruez 6y ago
    >At the end of a buyback the company owns more of its own shares, and investors own less No, they own the same amount (as a group, proportionally), and each remaining shareholder owns more. Furthermore, the shareholders (as a group that owned the stock before the buyback was done) does get paid, because some of the shareholders sold their stake for cash. >Dividends are payments to those who own shares, and the company does not own more of anything after a Dividend pay out. Dividend payments aren't free. In fact, you can see that for dividend paying stocks, the share price steadily goes in the months leading up to a dividend payment, and on the dividend date it goes down roughly equal to the dividend paid.
    - unkulunkulu 6y ago
      > Dividend payments aren't free. In fact, you can see that for dividend paying stocks, the share price steadily goes in the months leading up to a dividend payment, and on the dividend date it goes down roughly equal to the dividend paid. I thought it was a matter of math: company gave away some amount of money per share so it should have lost exactly that amount in valuation, what’s the catch?
      - kgwgk 6y ago
        Taxes are one of the reasons why the decline in price due to the dividend distribution may not be exactly equal to the amount distributed. And of course the decline in price due to the dividend distribution cannot be measured.
      - deleted 6y ago
        [deleted]
  - deleted 6y ago
    [deleted]
  - kgwgk 6y ago
    > At the end of a buyback the company owns more of its own shares, and investors own less. The company bought something for its money. Treasury shares can be ignored for most purposes and are often destroyed.

Pokepokalypse 6y ago

That's really what all the "sensible" people (myself included) - were saying back in 1996 when P-E valuations really went off the rails. Yes, there were drops, crashes, and those hurt a lot of people, but in the long run, growth has continued to go up.

gruez 6y ago
>were saying back in 1996 when P-E valuations really went off the rails. At least this time around, it's worth noting that money has become much cheaper, which inflates the price of every asset. When that's factored in, the present valuations are actually quite reasonable.
- tertius 6y ago
  > the present valuations are actually quite reasonable. Any charts to show this?
triangleman 6y ago
Yes, in the long run the economy is driven by productivity growth. However there are debt cycles at work: https://economicprinciples.org/ https://economicprinciples.org/ The world may be near the end of a long-term debt cycle, we will have to see. In 1996 PE multiples were indeed high and there was indeed a correction. For instance the Nasdaq went from 1300 at the end of 1996, to over 5000, and back to 1300 in 2002. There was obviously productivity growth over 7 years, but valuations are another thing entirely.
- habitue 6y ago
  Just a disclaimer for people reading, `economicprinciples.org`, despite having a very official sounding name, is presenting Ray Dalio's theories, not widely held economic principles. None of it seems to me (although I am not an economist), but it should probably be taken with a grain of salt.

gruez 6y ago

>She stated that she's come to believe the speculation of company value is nothing but a pyramid scheme divorced from any actual value of said company. How so? What's the evidence for this, especially when you consider that the company's stock price goes up/down depending on their quarterly performance?

VBprogrammer 6y ago
I think some of the recently IPOed tech stocks must be viewed in this light. For example, Deliveroo is basically a platform for skimming off of a market which until recently was mostly people working off books often without the correct insurance. They have undoubtedly unlocked some value in the system by allowing us to order from places which didn't previously provide that service (e.g McDonalds). But whether this justifies a £7bn valuation, I'm not convinced. I think so far investors have been lucky with some of the tech companies which have IPOed and then proven that they do have the potential to generate a profit. I don't think it will take too many of these unicorns to IPO and fail before the blood bath in the "tech" industry begins.