4 ms·

"By that definition, stocks too are ponzis. No. Stocks have an external source of revenue, namely the profit that the company makes by selling its products and

by wyc 5y ago

"By that definition, stocks too are ponzis. No. Stocks have an external source of revenue, namely the profit that the company makes by selling its products and services to customers..." This is a very simplistic view of equities markets and does not explain penny stocks, meme stocks (GME/AMC), TSLA, and other things that seem to escape traditional fundamental analyses.

onlyrealcuzzo 5y ago
The vast majority of equities by value are not penny stocks or meme stocks.
- exdsq 5y ago
  Still the value compared to profits are way off in traditional finance at the moment
- Kranar 5y ago
  The average P/E ratio of U.S. stocks is 38, meaning if the value of a stock really is primarily based on its ability to produce an external source of revenue, it would take 38 years for an investor to recoup the cost of a share of a company. When you adjust for 2% inflation, it would take 117 years for someone to recoup the cost. Since that exceeds the lifespan of well over 99% of the population, it must follow that people are not investing in stocks because they expect the company to produce some external source of revenue that will eventually repay the principle. There are a host of complex reasons why people invest including wealth preservation, a desire to support a company they are interested in, speculation, a belief that investing is smart and the right thing to do... these are all fine reasons, but they have little to do with some kind of fundamental valuation that some people think stocks intrinsically have. The vast majority of gains from the stock market have next to nothing to do with external sources of revenue.
  - deleted 5y ago
    [deleted]
  - minitoar 5y ago
    You don’t need to completely repay the principal to benefit from that cash flow.
    - Kranar 5y ago
      What other ways could you benefit? Imagine that you had no expectation of selling your share for a higher price in the future, then what other way is there to benefit? You have a shareholder vote, okay but the percentage of shareholders who actually vote is roughly 9%. The only people doing the voting are large institutions, not individuals: https://www.broadridge.com/proxypulse/reports/2013/second-edition.html https://www.broadridge.com/proxypulse/reports/2013/second-ed...
      - minitoar 5y ago
        I could collect dividends for a time and then sell the share for what I paid.
        Kranar 5y ago
        Dividends have no net effect on how much you earn from a share. If a stock is currently priced at X and then pays out a dividend of Y, the price of the stock decreases by Y so that there is no overall effect on the value. The reason for this can be understood in many different ways, but one way I like to look at it is if paying a dividend had no effect on the price of a stock, then one could in principle buy a share of the stock at a price of X just before the dividend is paid and then sell the stock at a price of X just after the dividend is paid just as you describe, effectively pocketing the dividend and earning an almost risk free return. Of course in practice we know that on average the price of a stock drops by the exact amount of the dividend paid, and hence collecting a dividend has no overall effect on the value of a stock.
        minitoar 5y ago
        That isn’t what I’ve described. I said “for a time” and you chose to interpret it as something very specific.
  - adolph 5y ago
    > if the value of a stock really is primarily based on its ability to produce an external source of revenue, it would take 38 years for an investor to recoup the cost of a share of a company Since a minority of stocks return a dividend, then the holder of said stock likely never sees a cent of company earnings. Time duration to recoup cost of stock by P/E is NaN. The vast majority of gains from the stock market have to do with inability to invest in new ideas (on both supply and demand side). https://www.quora.com/What-percentage-of-publicly-traded-companies-in-the-USA-regularly-quarterly-annually-pay-dividends-to-shareholders?share=1 https://www.quora.com/What-percentage-of-publicly-traded-com...
  - onlyrealcuzzo 5y ago
    You're forgetting that The Fed pumps up asset prices, share buybacks, and that capital gains are taxed less than income. It's not that simple.
wpietri 5y ago
It doesn't explain which horse wins in the 4th race at Churchill Downs, either. Major financial markets do attract scams and gambling-like behavior the same way picnics attract flies. The reputable exchanges work to shut that a lot of that out, of course, because it's bad business. Tesla unfortunately undermines your argument. Has it been hyped to the moon? Definitely. Is there a good chance people will lose a lot of money on it? That too. But they make actual cars that get actual people actual places. That is the kind of actual value creation that underlies most stocks.

by wyc 5y ago

onlyrealcuzzo 5y ago

The vast majority of equities by value are not penny stocks or meme stocks.

exdsq 5y ago
Still the value compared to profits are way off in traditional finance at the moment
Kranar 5y ago
The average P/E ratio of U.S. stocks is 38, meaning if the value of a stock really is primarily based on its ability to produce an external source of revenue, it would take 38 years for an investor to recoup the cost of a share of a company. When you adjust for 2% inflation, it would take 117 years for someone to recoup the cost. Since that exceeds the lifespan of well over 99% of the population, it must follow that people are not investing in stocks because they expect the company to produce some external source of revenue that will eventually repay the principle. There are a host of complex reasons why people invest including wealth preservation, a desire to support a company they are interested in, speculation, a belief that investing is smart and the right thing to do... these are all fine reasons, but they have little to do with some kind of fundamental valuation that some people think stocks intrinsically have. The vast majority of gains from the stock market have next to nothing to do with external sources of revenue.
- deleted 5y ago
  [deleted]
- minitoar 5y ago
  You don’t need to completely repay the principal to benefit from that cash flow.
  - Kranar 5y ago
    What other ways could you benefit? Imagine that you had no expectation of selling your share for a higher price in the future, then what other way is there to benefit? You have a shareholder vote, okay but the percentage of shareholders who actually vote is roughly 9%. The only people doing the voting are large institutions, not individuals: https://www.broadridge.com/proxypulse/reports/2013/second-edition.html https://www.broadridge.com/proxypulse/reports/2013/second-ed...
    - minitoar 5y ago
      I could collect dividends for a time and then sell the share for what I paid.
      - Kranar 5y ago
        Dividends have no net effect on how much you earn from a share. If a stock is currently priced at X and then pays out a dividend of Y, the price of the stock decreases by Y so that there is no overall effect on the value. The reason for this can be understood in many different ways, but one way I like to look at it is if paying a dividend had no effect on the price of a stock, then one could in principle buy a share of the stock at a price of X just before the dividend is paid and then sell the stock at a price of X just after the dividend is paid just as you describe, effectively pocketing the dividend and earning an almost risk free return. Of course in practice we know that on average the price of a stock drops by the exact amount of the dividend paid, and hence collecting a dividend has no overall effect on the value of a stock.
        minitoar 5y ago
        That isn’t what I’ve described. I said “for a time” and you chose to interpret it as something very specific.
- adolph 5y ago
  > if the value of a stock really is primarily based on its ability to produce an external source of revenue, it would take 38 years for an investor to recoup the cost of a share of a company Since a minority of stocks return a dividend, then the holder of said stock likely never sees a cent of company earnings. Time duration to recoup cost of stock by P/E is NaN. The vast majority of gains from the stock market have to do with inability to invest in new ideas (on both supply and demand side). https://www.quora.com/What-percentage-of-publicly-traded-companies-in-the-USA-regularly-quarterly-annually-pay-dividends-to-shareholders?share=1 https://www.quora.com/What-percentage-of-publicly-traded-com...
- onlyrealcuzzo 5y ago
  You're forgetting that The Fed pumps up asset prices, share buybacks, and that capital gains are taxed less than income. It's not that simple.

wpietri 5y ago

It doesn't explain which horse wins in the 4th race at Churchill Downs, either. Major financial markets do attract scams and gambling-like behavior the same way picnics attract flies. The reputable exchanges work to shut that a lot of that out, of course, because it's bad business. Tesla unfortunately undermines your argument. Has it been hyped to the moon? Definitely. Is there a good chance people will lose a lot of money on it? That too. But they make actual cars that get actual people actual places. That is the kind of actual value creation that underlies most stocks.