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Honest question: I fail to see to difference between this (the pyramid scheme part) and let's say buying stock in early Apple or Google?

gizmo 5y ago
If you consider the market a casino there is no difference. Buy low sell high. But if you approach the market like an investor you try to estimate the intrinsic value of the assets and liabilities of a company, their cash flows, their growth prospects, and their management. Then you find those companies where the market price doesn't match what you think the business is worth and you go long/short those businesses where you think the mismatch is the greatest.
notahacker 5y ago
If (when) new people stop buying into a pyramid scheme, all they have are worthless tokens nobody else wants. If new people stop buying into AAPL or GOOG, all shareholders have is a share of a massive pile of cash and a business which generates billions in profit every quarter. For related reasons, people are likely to continue buying into AAPL or GOOG, AAPL and GOOG can buy back their own shares or find other investors easily if a major investor wants out, and even if for some strange reason nobody at all wants AAPL or GOOGL, shareholders would still expect to get back what they paid in dividends in the long run by holding. Of course, the businesses can still underperform expectations or fail, but there's a difference between an investment that underperforms because the company isn't good enough at making money and an "investment" that will eventually fail because there isn't actually anyone making money out of anyone other than "investors"
jtolmar 5y ago
The value of stock comes from a several things: - A voting share lets you participate in company decisions (not that anyone votes for much other than the board recommendations / increasing profits) - The company may pay dividends - The company may participate in stock buybacks - If the company is sold, the profits are distributed among shareholders - The value of all of the above grows if a company grows, so stock in a growing company is worth more - The same "get in early before other people get in and raise the price" mechanism as a pyramid scheme And then all of those factors are awkwardly summed together into a single number.
maaaaattttt 5y ago
Thank you for the clarifications.

gizmo 5y ago

If you consider the market a casino there is no difference. Buy low sell high. But if you approach the market like an investor you try to estimate the intrinsic value of the assets and liabilities of a company, their cash flows, their growth prospects, and their management. Then you find those companies where the market price doesn't match what you think the business is worth and you go long/short those businesses where you think the mismatch is the greatest.

notahacker 5y ago

If (when) new people stop buying into a pyramid scheme, all they have are worthless tokens nobody else wants. If new people stop buying into AAPL or GOOG, all shareholders have is a share of a massive pile of cash and a business which generates billions in profit every quarter. For related reasons, people are likely to continue buying into AAPL or GOOG, AAPL and GOOG can buy back their own shares or find other investors easily if a major investor wants out, and even if for some strange reason nobody at all wants AAPL or GOOGL, shareholders would still expect to get back what they paid in dividends in the long run by holding. Of course, the businesses can still underperform expectations or fail, but there's a difference between an investment that underperforms because the company isn't good enough at making money and an "investment" that will eventually fail because there isn't actually anyone making money out of anyone other than "investors"

jtolmar 5y ago

The value of stock comes from a several things: - A voting share lets you participate in company decisions (not that anyone votes for much other than the board recommendations / increasing profits) - The company may pay dividends - The company may participate in stock buybacks - If the company is sold, the profits are distributed among shareholders - The value of all of the above grows if a company grows, so stock in a growing company is worth more - The same "get in early before other people get in and raise the price" mechanism as a pyramid scheme And then all of those factors are awkwardly summed together into a single number.

maaaaattttt 5y ago

Thank you for the clarifications.