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Disagree. The whole premise of fundamental analysis is to justify the stock price by its corporate earnings, which is at least expressing an interest in corpora

Disagree. The whole premise of fundamental analysis is to justify the stock price by its corporate earnings, which is at least expressing an interest in corporate earnings. Forecasts of such earnings may sometimes be wildly wrong, sure, but this is still qualitatively different than "GME to the moon" which never pretended to bother about the earnings to begin with.

ZephyrBlu 5y ago
> The whole premise of fundamental analysis is to justify the stock price by its corporate earnings Isn't this an example of the GP's point? There's no intrinsic reason for earnings to be directly related to stock price. Like you said, it's a justification not reasoning.
- e1g 5y ago
  Say I’m offering a contract to pay you $100 every month for as long as I'm alive. Would you buy that for $1? What about $1M? Something price in-between? Does the price change if it’s Bill Gates offering? What if it's the US government? Does it change based on your life expectancy, the tax treatment of that $100, expected inflation rates, if a bunch of investors want to buy this contract, or if the payment is “maybe $100, but sometimes more or sometimes less, within a reasonable range”? There is a calculable and narrow band for the fundamental price of this contract, and it’s intrinsically based on two things: how much I promise to pay back (~return) and how believable it is (~risk). "Corporate earnings" are equivalent to this monthly payment, just the payments take the shape of dividends, or share buy-backs, or reinvestment which promise even greater corporate earnings.
  - sushibuffet 5y ago
    Many stocks don't pay dividends and re-investment is extremely fuzzy and hard to value because it depends on insider knowledge.
    - e1g 5y ago
      In the US specifically, issuing dividends is a suboptimal strategy for returning money to shareholders due to taxation. While dividends are common elsewhere, the two standard strategies in the USA are share buybacks and reinvesting into growth. Buybacks work because increase demand + reduced supply = your holdings go up. Reinvestments work because higher returns in the future = people will buy the contract from you for more than you paid for it. In either case, it's the equivalent of the company "giving" you $X that month, just not as a bank transfer but as capital gains that you can shuffle as per your tax strategy. >... and re-investment is extremely fuzzy and hard to value. Yes. And the more this is true, the more that "stock" becomes a "stonk".
- noahatwi 5y ago
  > There's no intrinsic reason for earnings to be directly related to stock price. Yes there absolutely is. If you are the owner of a company you may divert the future earnings to your own bank account, which has a precisely defined value. Your counterargument may be that minority shareholders never have the power to affect distributions of earnings, but that is also false. Minority shareholders at minimum hold the power of arbitrage between majority shareholders.
- fennecfoxen 5y ago
  > There's no intrinsic reason for earnings to be directly related to stock price. You are buying a share in an income stream! You are using your money to buy money! If there is no intrinsic reason for this to have a price that is measured in money, where exactly do you think a price measured in money is appropriate?
  - staticman2 5y ago
    Corporations are not required to share their income stream with investors, either directly through dividends or indirectly through buybacks. The "income stream" concept is only theoretical.
    - superdimwit 5y ago
      If they don't, and can't demonstrate that they're doing something else useful with that money, investors get angry and fire the board.
deleted 5y ago
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viscanti 5y ago
That assumes that companies will pay dividends and your can get a good estimate of future yield to value. Corporate earnings are a proxy for potential future yield when there might be future yield. But most large tech companies don't regularly (or don't ever) plan on doing that. We're left with a proxy that no longer works in most cases and in the cases it can, has already been arbitraged so that retail investors won't be buying future cash flows through dividends at reasonable rates.
- jkhdigital 5y ago
  Dividends are not the only way to distribute earnings; stock buybacks are a very popular method as well.
  - fennecfoxen 5y ago
    Stock buybacks are, if anything, often considered preferable to dividends, because they allow people who invest outside of tax shelters to control whether or not they want to have taxable income this year (by selling the stock on their own schedule, rather than getting a dividend on the company's schedule).
- fennecfoxen 5y ago
  Yes, it assumes you can get an estimate. Yes, this assumption can be problematic. Yes, there are limits. But, again, even the most problematic estimate is leagues ahead of "diamond hands, diamond hands, GME to the moon". No, "yield" in terms of dividends is not necessary. Owning a share in a company that puts cash in a bank account is also worth money.
- JumpCrisscross 5y ago
  > assumes that companies will pay dividends The most powerful practical enforcers of valuations are M&A and debt financing. Both are highly dependent on cash flows. You can narrate a stock up and down until the cows come home, but acquisitions and debt will set a fundamental floor based on economic reality. (There is no similar mechanism limiting upside given our cultural aversion to short selling.)

ZephyrBlu 5y ago

> The whole premise of fundamental analysis is to justify the stock price by its corporate earnings Isn't this an example of the GP's point? There's no intrinsic reason for earnings to be directly related to stock price. Like you said, it's a justification not reasoning.

e1g 5y ago
Say I’m offering a contract to pay you $100 every month for as long as I'm alive. Would you buy that for $1? What about $1M? Something price in-between? Does the price change if it’s Bill Gates offering? What if it's the US government? Does it change based on your life expectancy, the tax treatment of that $100, expected inflation rates, if a bunch of investors want to buy this contract, or if the payment is “maybe $100, but sometimes more or sometimes less, within a reasonable range”? There is a calculable and narrow band for the fundamental price of this contract, and it’s intrinsically based on two things: how much I promise to pay back (~return) and how believable it is (~risk). "Corporate earnings" are equivalent to this monthly payment, just the payments take the shape of dividends, or share buy-backs, or reinvestment which promise even greater corporate earnings.
- sushibuffet 5y ago
  Many stocks don't pay dividends and re-investment is extremely fuzzy and hard to value because it depends on insider knowledge.
  - e1g 5y ago
    In the US specifically, issuing dividends is a suboptimal strategy for returning money to shareholders due to taxation. While dividends are common elsewhere, the two standard strategies in the USA are share buybacks and reinvesting into growth. Buybacks work because increase demand + reduced supply = your holdings go up. Reinvestments work because higher returns in the future = people will buy the contract from you for more than you paid for it. In either case, it's the equivalent of the company "giving" you $X that month, just not as a bank transfer but as capital gains that you can shuffle as per your tax strategy. >... and re-investment is extremely fuzzy and hard to value. Yes. And the more this is true, the more that "stock" becomes a "stonk".
noahatwi 5y ago
> There's no intrinsic reason for earnings to be directly related to stock price. Yes there absolutely is. If you are the owner of a company you may divert the future earnings to your own bank account, which has a precisely defined value. Your counterargument may be that minority shareholders never have the power to affect distributions of earnings, but that is also false. Minority shareholders at minimum hold the power of arbitrage between majority shareholders.
fennecfoxen 5y ago
> There's no intrinsic reason for earnings to be directly related to stock price. You are buying a share in an income stream! You are using your money to buy money! If there is no intrinsic reason for this to have a price that is measured in money, where exactly do you think a price measured in money is appropriate?
- staticman2 5y ago
  Corporations are not required to share their income stream with investors, either directly through dividends or indirectly through buybacks. The "income stream" concept is only theoretical.
  - superdimwit 5y ago
    If they don't, and can't demonstrate that they're doing something else useful with that money, investors get angry and fire the board.

deleted 5y ago

[deleted]

viscanti 5y ago

That assumes that companies will pay dividends and your can get a good estimate of future yield to value. Corporate earnings are a proxy for potential future yield when there might be future yield. But most large tech companies don't regularly (or don't ever) plan on doing that. We're left with a proxy that no longer works in most cases and in the cases it can, has already been arbitraged so that retail investors won't be buying future cash flows through dividends at reasonable rates.

jkhdigital 5y ago
Dividends are not the only way to distribute earnings; stock buybacks are a very popular method as well.
- fennecfoxen 5y ago
  Stock buybacks are, if anything, often considered preferable to dividends, because they allow people who invest outside of tax shelters to control whether or not they want to have taxable income this year (by selling the stock on their own schedule, rather than getting a dividend on the company's schedule).
fennecfoxen 5y ago
Yes, it assumes you can get an estimate. Yes, this assumption can be problematic. Yes, there are limits. But, again, even the most problematic estimate is leagues ahead of "diamond hands, diamond hands, GME to the moon". No, "yield" in terms of dividends is not necessary. Owning a share in a company that puts cash in a bank account is also worth money.
JumpCrisscross 5y ago
> assumes that companies will pay dividends The most powerful practical enforcers of valuations are M&A and debt financing. Both are highly dependent on cash flows. You can narrate a stock up and down until the cows come home, but acquisitions and debt will set a fundamental floor based on economic reality. (There is no similar mechanism limiting upside given our cultural aversion to short selling.)