Also, one other point for Bitt concerns the price to earnings (P/E) ratio. To keep the numbers simple, let's say we have a hypothetical company which makes a profit of $1M/year. There are also 1M outstanding shares (for a profit of $1/share). Clearly, if you bought all the shares for $1/each, then you would control the company and would recover your investment in a single year if you chose to pay yourself that entire profit as a dividend. Unsurprisingly, if the stock were trading at $1/share (and having a P/E ratio of 1.0), that would be very attractive for exactly this reason. And, as a direct result, the share price (and the P/E ratio) would increase and the market would eventually reach a price equilibrium.

If you look at various stocks, you'll see P/E ratios all over the map. To pick a random sampling of stocks, Ford's P/E ratio is 7.58. 3M's is 18.25. Google's is 69.07. Ford and 3M pay dividends (5.1% and 2.5%, respectively), while Google doesn't pay any dividend.

So, if you were to buy a controlling share of Ford and were to pay yourself massive dividends, you could recover your investment in eight years, versus 18 for 3M. However, the market is more concerned that Ford will collapse under a mountain of its own debt. Thus, Ford shares are less valuable than 3M, despite the fact that they're paying out twice the dividend rate. Still, the prices aren't random at all. They make perfect sense. I'd argue that no Kool-Aid is necessary to wrap your brain around how Ford and 3M are priced and you could probably even derive those prices from first principles.

Google, and any other "growth" company, require some amount of Kool-Aid to understand. Unlike many of the earlier dot-com bombs, Google is actually making heaping piles of real profit, so there's clearly "value" in its shares. However, those higher P/E ratios stocks tend to also have higher price volatility, precisely because the stock prices is being driven more by emotions and less by hard "value" data, as with Ford or 3M.

Maybe we can invent a "Bitt Index", where a low-numbered value says an investment is concrete and sensible, and a high-numbered value says an investment is pure Kool-Aid. If you buy a government or blue-chip corporate bond and hold it until it matures, they're promising to pay you back your money with a fixed interest rate. Your profit is entirely predictable. That should have a nice, low Bitt number, but it's also generally going to have a lower return (these days, under 5% yield). You can also trade those bonds, prior to their maturity. They still have a guaranteed payout to the bond holder when it matures, but the price of the bonds will fluctuate. So, bond trading, of the very same bonds, would seem to have a higher Bitt number. Of course, bigger bond profits happen when you get "junk" or "emerging market" bonds, where there are legitimate concerns about whether the bond issuer will actually pay out when the bonds mature. In order to overcome this, the bond issuers have to promise higher returns. More risk, higher Bitt number, more potential reward.

Stocks, like bonds, will have variable placement on the Bitt Index. If you own 10% of your cousin's auto parts store and he pays you a hefty dividend every year on his profits, then you would probably give that a reasonable low Bitt number. As the percentage of the firm you own goes down and/or the dividend rate goes down, the Bitt number increases. But, what if you cousin wanted to reinvest his profits to expand his store, rather than paying you a dividend? He might be able to pay you more dividends later on. Higher Bitt number, more risk, more potential reward.