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I have been looking for this answer since I first heard about the idea of stock as a kid. No one else could ever provide it. Thank you. "A rational stock valua

I have been looking for this answer since I first heard about the idea of stock as a kid. No one else could ever provide it. Thank you. "A rational stock valuation is the NPV of all future dividends"

dpark 15y ago
Don't get too wrapped up in that answer. It assumes that investors are rational and able to see the future, when they are neither. Stock value is based on the same thing as everything else: what someone else will pay. Stock prices are no more rational than home prices.
- jcampbell1 15y ago
  False. There is plenty of dispute about the NPV of all future dividends and the discount rate, but the notion is a fundamental truth. It is follows from basic math and is provable.
  - joshu 15y ago
    indeed. pretty much all the points arguing with you are actually just discussing ways to value npv.
    - dpark 15y ago
      Okay, but that's not what he's claiming. He's claiming that NPV is derived exclusively (and rationally, and perhaps clairvoyantly) from the future sum of dividends.
      - joshu 15y ago
        The value of the stock is the current estimation of that npv. How it is estimated is irrelevant. It is the group estimation across all buyers and sellers.
        dpark 15y ago
        I feel like you're taking part in some unrelated discussion. This entire discussion started because jcampbell claimed that NPV was derived from the sum of future dividends. (Actually, he claimed that stock price was NPV of those future dividends.) No one here seems to be disputing that stock has a NPV. They're disputing jcampbell's claim that NPV is derived exclusively from future dividends. You're arguing against a claim that no one is making.
        joshu 15y ago
        i think we have a disconnect. what do you think an npv of a stock is?
        dpark 15y ago
        The sum of all the cash flows related to the stock (discounted for time). Dividends are not the only factor there. For most investors and most stock, the future sale price (i.e. when I sell my share) is the major factor, and any dividends are a minor factor.
        joshu 15y ago
        When you sell your share, someone else buys it. How do THEY value it? someday in the distant future, the stock is going to pay a dividend. cash flows are what enable them to do it. eventually the company has nothing to do with the cash but to pay it out.
        dpark 15y ago
        They might value it by expecting dividends, or they might value it by expecting the share price to grow, or they might value it by expecting a profitable acquisition. Hell, they might buy it hoping the company will liquidate and disburse its holdings. Dividends are only one possible payout that can come from buying stock. You and jcampbell are making the same mistake. You're looking at dividends, seeing a reasonable explanation for stock pricing, and then simply asserting that what's reasonable must be true. But it's not true. A ton of things factor into stock pricing and value. Some are rational, like attempting to estimate the future value of dividends or an acquisition. Some are irrational, like assuming that upward trajectory will continue "just because". And others are in the middle, like believing that timing the market is possible.
  - dereg 15y ago
    You would have done well at Lehman Brothers, really really well.
  - dpark 15y ago
    It's provable? Please enlighten me.
jcampbell1 15y ago
You are welcome. When you buy a stock, you are buying two things: rights to the profits (via dividends), and rights to manage the company (stock voting). Most people you encounter don't undersand stocks at all, and I'll likely be downvoted to hell, but those fools are wrong. Don't listen. Valuation is a super complicated subject, but what stock represents is a simple fact.
- dereg 15y ago
  You're wrong. You're oversimplifying stock valuation to a hazard. You cannot use the dividend discount model to value stocks that pay no dividends. This is a fact. Furthermore, a dividend is not the only source of return from a stock, there's also capital appreciation. A stock appreciates for various reasons including investor sentiment and share repurchases (another way for a company to distribute profits). Also, you don't necessarily receive a voting right for a common share. Like you said, valuation is a super complicated subject so don't mislead others with an incorrect simplification of it.
  - sopooneo 15y ago
    But why would capital appreciation matter if the stock holder never gets to take that capitol? Aside from voting rights, if you assume a stock will never pay dividends, I don't understand how it would have any value at all.
    - dereg 15y ago
      That's a really good question. First, to clarify, capital appreciation refers to the increase of the price of a stock. Investors buy stocks for a different reasons. The primary reason is to receive a return on that investment. Return is an all-encompassing word. Investors earn a return if the stock price goes up or if the company pays dividends. There are many companies that don't distribute dividends, either because (1) they may be in poor financial health or because (2) they prefer to reinvest that money in assets that will help generate more return. Even without the dividends, people do buy these companies. In the second case, a company's earnings are expected to rapidly increase, thereby generating more value and lifting the price of the stock. (These are called growth stocks.) Analysts have developed a gazillion ways to determine a stock's value and potential return. Like many other things, the value of stock is in the eye of the beholder. You could be willing to purchase a share of Google for $2, while I may only be willing to spend $1 for a share. A market for Google develops when millions of people apply their own valuations of Google into buying and selling that stock. It's the market mechanism gives the a stock value (price). It's likely that this answer won't satisfy you, because I'm essentially telling you that a market capitalization is in the eye of the beholder. Questioning a stock's value is an existential question that applies to everything that we buy, hold, or sell. It's likely that this answer won't satisfy you, but it shouldn't. Nobody should ever feel that they "know" the value of a stock, that's preposterous.

I have been looking for this answer since I first heard about the idea of stock as a kid. No one else could ever provide it. Thank you. "A rational stock valuation is the NPV of all future dividends"

dpark 15y ago

Don't get too wrapped up in that answer. It assumes that investors are rational and able to see the future, when they are neither. Stock value is based on the same thing as everything else: what someone else will pay. Stock prices are no more rational than home prices.

jcampbell1 15y ago
False. There is plenty of dispute about the NPV of all future dividends and the discount rate, but the notion is a fundamental truth. It is follows from basic math and is provable.
- joshu 15y ago
  indeed. pretty much all the points arguing with you are actually just discussing ways to value npv.
  - dpark 15y ago
    Okay, but that's not what he's claiming. He's claiming that NPV is derived exclusively (and rationally, and perhaps clairvoyantly) from the future sum of dividends.
    - joshu 15y ago
      The value of the stock is the current estimation of that npv. How it is estimated is irrelevant. It is the group estimation across all buyers and sellers.
      - dpark 15y ago
        I feel like you're taking part in some unrelated discussion. This entire discussion started because jcampbell claimed that NPV was derived from the sum of future dividends. (Actually, he claimed that stock price was NPV of those future dividends.) No one here seems to be disputing that stock has a NPV. They're disputing jcampbell's claim that NPV is derived exclusively from future dividends. You're arguing against a claim that no one is making.
        joshu 15y ago
        i think we have a disconnect. what do you think an npv of a stock is?
        dpark 15y ago
        The sum of all the cash flows related to the stock (discounted for time). Dividends are not the only factor there. For most investors and most stock, the future sale price (i.e. when I sell my share) is the major factor, and any dividends are a minor factor.
        joshu 15y ago
        When you sell your share, someone else buys it. How do THEY value it? someday in the distant future, the stock is going to pay a dividend. cash flows are what enable them to do it. eventually the company has nothing to do with the cash but to pay it out.
        dpark 15y ago
        They might value it by expecting dividends, or they might value it by expecting the share price to grow, or they might value it by expecting a profitable acquisition. Hell, they might buy it hoping the company will liquidate and disburse its holdings. Dividends are only one possible payout that can come from buying stock. You and jcampbell are making the same mistake. You're looking at dividends, seeing a reasonable explanation for stock pricing, and then simply asserting that what's reasonable must be true. But it's not true. A ton of things factor into stock pricing and value. Some are rational, like attempting to estimate the future value of dividends or an acquisition. Some are irrational, like assuming that upward trajectory will continue "just because". And others are in the middle, like believing that timing the market is possible.
- dereg 15y ago
  You would have done well at Lehman Brothers, really really well.
- dpark 15y ago
  It's provable? Please enlighten me.

jcampbell1 15y ago

You are welcome. When you buy a stock, you are buying two things: rights to the profits (via dividends), and rights to manage the company (stock voting). Most people you encounter don't undersand stocks at all, and I'll likely be downvoted to hell, but those fools are wrong. Don't listen. Valuation is a super complicated subject, but what stock represents is a simple fact.

dereg 15y ago
You're wrong. You're oversimplifying stock valuation to a hazard. You cannot use the dividend discount model to value stocks that pay no dividends. This is a fact. Furthermore, a dividend is not the only source of return from a stock, there's also capital appreciation. A stock appreciates for various reasons including investor sentiment and share repurchases (another way for a company to distribute profits). Also, you don't necessarily receive a voting right for a common share. Like you said, valuation is a super complicated subject so don't mislead others with an incorrect simplification of it.
- sopooneo 15y ago
  But why would capital appreciation matter if the stock holder never gets to take that capitol? Aside from voting rights, if you assume a stock will never pay dividends, I don't understand how it would have any value at all.
  - dereg 15y ago
    That's a really good question. First, to clarify, capital appreciation refers to the increase of the price of a stock. Investors buy stocks for a different reasons. The primary reason is to receive a return on that investment. Return is an all-encompassing word. Investors earn a return if the stock price goes up or if the company pays dividends. There are many companies that don't distribute dividends, either because (1) they may be in poor financial health or because (2) they prefer to reinvest that money in assets that will help generate more return. Even without the dividends, people do buy these companies. In the second case, a company's earnings are expected to rapidly increase, thereby generating more value and lifting the price of the stock. (These are called growth stocks.) Analysts have developed a gazillion ways to determine a stock's value and potential return. Like many other things, the value of stock is in the eye of the beholder. You could be willing to purchase a share of Google for $2, while I may only be willing to spend $1 for a share. A market for Google develops when millions of people apply their own valuations of Google into buying and selling that stock. It's the market mechanism gives the a stock value (price). It's likely that this answer won't satisfy you, because I'm essentially telling you that a market capitalization is in the eye of the beholder. Questioning a stock's value is an existential question that applies to everything that we buy, hold, or sell. It's likely that this answer won't satisfy you, but it shouldn't. Nobody should ever feel that they "know" the value of a stock, that's preposterous.