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In the short-term, yes. In the long-term, no. When dealing with investments, over the long-run their price will match their value. However, in the short-run,
by mdasen 18y ago
In the short-term, yes. In the long-term, no.
When dealing with investments, over the long-run their price will match their value. However, in the short-run, the price will be whatever other people are willing to pay for it. So, in boom times that's often higher than value and in recession that's often lower than value. And in the short-run, new buyers of a stock pay back the older buyers just like a Ponzi scheme, but in the long run the company's value is what determines the price.
So, maybe you want to play the system and buy and sell based on these trends, but that's hard. Heck, Harvard's endowment fund couldn't do it, you think you'll be able to? It's a lot easier to focus on the long-run and invest in things that are good values.
The real problem that we're seeing here isn't that there are market fluctuations. It's that people wanted to put things in stocks that they thought they'd be using as cash in 6-18 months - specifically, retirement savings. If you're not one of the rich whose wealth will outlast their life, you need to move money from stocks into less risky investments as your retirement date approaches. If you don't, then you have to be flexible with when you retire and how much you'll have. But everyone wanted that extra hundred-grand or something to retire on - why move into safe investments when stocks have done so well? I don't want to loose out on some additional cash for retirement!
Heck, most investment firms have auto-adjusting funds that become more risk averse as you reach retirement age, but they aren't as popular as they should be because people don't want safe as much as they want more. In some ways it's like an unintentional scam. Investment professionals will caution you against being too risky just like a con-person tries to dissuade their mark, but the mark sees what they want and thinks the con is trying to keep them from money. . .and then it collapses. The difference is that the investment professional is (usually) being sincere about avoiding risk.
Be careful, don't over-extend yourself with visions of gold, and don't count those golden eggs before they hatch.
- mudetroit 18y agoThe more fundamental problem was the philosophical shift from holding stock being a means to collect a dividend to expecting the short term ability to purchase stock and sell it for a profit. If you sit and think about it logically, why does a stock that doesn't pay a dividend have any intrinsic value attached to it? Yet we have built an economic structure that says that it is possible for that piece of paper to gain value.
- nostrademons 18y agoBecause the money that would be paid out as dividends is instead reinvested in the company, increasing its ability to produce profits in the future. Assuming that managers can find investment opportunities that exceed the return on capital that a shareholder would otherwise get, this is a good trade. This is a fairly big assumption. It tends to be true in younger, high growth companies, or companies where management is good at identifying other profitable markets to enter. This is why Google, Berkshire Hathaway, Apple, etc. never pay dividends, and why Microsoft didn't until recently. Unfortunately, managers tend to be pretty poor at realizing when their market is no longer growing. So they'll think they can buy growth by acquiring companies or hiring more people, but end up destroying shareholder value when the exorbitant purchase prices don't pan out. Good for entrepreneurs, but bad for investors. It's not as simple as "dividends = good, stock price appreciation = bad". There's been a fair amount of academic mathematical finance devoted to dividends, and it showed that investors should be ambivalent about dividend yields, as long as management was economically rational (i.e. would only undertake investments if the expected return was greater than the cost of capital). A reduced dividend just means that more money stays within the company, which increases its future value.
- netcan 18y agoYou're still talking about a world where dividends still exist. They're being generated & reinvested. This is in order to create more dividends in the future. Once reinvesting becomes expected, it just means that dividends aren't getting paid. We blur that issued then reinvested concept & just readjust our expectation for companies to grow. The issue is that a situation where dividends are the norm, this keeps the system honest. Cash is harder to fake. If people own stock for dividends it's harder to get carried away. The reality is that many companies will probably never pay dividends justifying their current valuations. You can't just say that you've abstracted away the middle part & look at indicators of indicators of indicators forever. This isn't engineering. There is an enormous psychological element involved. You wouldn't get Uncle Khaled to invest in your shop if he visited & saw that no one walked through the door.
- 18y ago
- fizx 18y agoDon't forget that "in the long run, we're all dead." I don't know why I find that quote so ironic. :)