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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 t
by 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 agoMany stocks don't pay dividends and re-investment is extremely fuzzy and hard to value because it depends on insider knowledge.
- e1g 5y agoIn 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".