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#277822 - 22/03/2006 18:09 Re: Stock Market [Re: genixia]
tanstaafl.
carpal tunnel

Registered: 08/07/1999
Posts: 5403
Loc: Ajijic, Mexico
Why are we making this so complicated?

If I buy stock for $100 with the expectation of selling it later for $200, then that stock has value.

If I buy gold at $500 an ounce with the expectation of selling it later for $600 an ounce, then that gold has value.

If I own property, that property has value.

If I own the patent rights on a useful widget manufacturing process, those rights have value.

In all cases there is risk involved. The stock may sell for only $50, the price of gold may drop, the EPA may find ground contamination in my basement, the Japanese may figure a way of manufacturing widgets faster and cheaper. Risk applies to any asset, tangible or intangible, whether it be a paper certificate, a hunk of rare metal, real estate, or intellectual property.

However, any item that can be expected to return more than its cost of acquisition has value, and this certainly is the expectation when it comes to stocks.

tanstaafl.
_________________________
"There Ain't No Such Thing As A Free Lunch"

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#277823 - 22/03/2006 18:32 Re: Stock Market [Re: tanstaafl.]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
You also miss my point. Why does it have that value?
_________________________
Bitt Faulk

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#277824 - 22/03/2006 19:28 Re: Stock Market [Re: wfaulk]
Ezekiel
pooh-bah

Registered: 25/08/2000
Posts: 2413
Loc: NH USA
Because someone else says so. And they have money.

So, I guess my point is that desire is ultimately what gives value. If you desire something, you value it, therefore it is valuable. There is no intrinsic 'worth' of any item in this universe, save what WE determine. I desire not to be cold and wet, therefore, a roof, walls and a furnace have value.

-Zeke


Edited by Ezekiel (22/03/2006 19:30)
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WWFSMD?

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#277825 - 22/03/2006 22:51 Re: Stock Market [Re: wfaulk]
tanstaafl.
carpal tunnel

Registered: 08/07/1999
Posts: 5403
Loc: Ajijic, Mexico
You also miss my point. Why does it have that value?

Because it can be exchanged for other things more to your liking that also have value.

If someone gave you 200 shares of IBM stock, would you throw it away because it was valueless?

No, you would give it to someone in exchange for $16,890 (at the current selling price) which in turn could be used to fix the bumper on your Volvo and that would seem to be a pretty good indication that it does indeed have value.

tanstaafl.
_________________________
"There Ain't No Such Thing As A Free Lunch"

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#277826 - 23/03/2006 00:13 Re: Stock Market [Re: tanstaafl.]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Yes, but why does the other person want it? Your answer is so that he can sell it to someone else. And he wants it so he can sell it to someone else again. At some point, that chain has to stop, or that notion of worth is a complete pipe dream.
_________________________
Bitt Faulk

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#277827 - 23/03/2006 00:37 Re: Stock Market [Re: wfaulk]
tanstaafl.
carpal tunnel

Registered: 08/07/1999
Posts: 5403
Loc: Ajijic, Mexico
At some point, that chain has to stop, or that notion of worth is a complete pipe dream.

It does indeed, as it did in for example 1929, as it is going to do again sometime before 2010.

Before that happens, you will want to be invested in something that will have value under the changed circumstances. That does not alter the fact that at present, under the current circumstances, the stock does have value.

The value of any item is ephemeral, depending on the circumstances. If you were starving, you would happily trade gold for turnips on a pound for pound basis. People in California who think their condominiums are truly worth $650,000 are going to be in for a rude awakening when the bottom drops out of the real estate bubble sometime in the next couple of years, but until then, those condos really are worth that kind of money because, just like any asset, tangible or intangible, the value of that asset is no more and no less than what a willing buyer will pay for it.

People spend money to buy stocks to use as a tool to make more money. As long as you get off that train before it crashes (which I certainly plan to do) the stocks have value. Not value derived from being part owner of a company, but value derived from their potential to return to you more than it cost you to buy them.

Oh, yes... "...to make more money." There is another rude awakening on the horizion for the folks who think that money per se is a valuable asset. But that's a topic for another time.

tanstaafl.
_________________________
"There Ain't No Such Thing As A Free Lunch"

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#277828 - 23/03/2006 00:40 Re: Stock Market [Re: wfaulk]
matthew_k
pooh-bah

Registered: 12/02/2002
Posts: 2298
Loc: Berkeley, California
It stops when the company stops being profitable, or is worth more to a single investor than it is to the stockholders. If it stops being profitable, or even simply not profitable enough to justify the value of its assets, the assets will be sold off and the investors paid off (See: Knight Ridder). If it becomes more valuble to a different owner, they will make an offer, and the board will be forced to make the decision that maximizes the value for the shareholders (see peoplesoft, at&t).

Matthew

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#277829 - 23/03/2006 01:18 Re: Stock Market [Re: tanstaafl.]
DWallach
carpal tunnel

Registered: 30/04/2000
Posts: 3728
Just ask William Jennings Bryan and his Cross of Gold.

Insisting that stocks must have dividends to have intrinsic value is vaguely analogous to insisting that a dollar must be exchangeable for a prescribed amount of gold. Now, if we can convince Bitt that there's value in a non-dividend stock, then the next trick will be convincing him that "derivative" products (puts, calls, etc.) can also have value...

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#277830 - 23/03/2006 01:30 Re: Stock Market [Re: tanstaafl.]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Quote:
As long as you get off that train before it crashes (which I certainly plan to do) the stocks have value.

Yeah, but if you can't see that crash from the get-go, you're an imbecile, and if you hand it off to someone to get killed in the crash, you're an asshole.

In my opinion.
_________________________
Bitt Faulk

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#277831 - 23/03/2006 02:35 Re: Stock Market [Re: DWallach]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Quote:
Insisting that stocks must have dividends to have intrinsic value is vaguely analogous to insisting that a dollar must be exchangeable for a prescribed amount of gold.

I don't think that that analogy is entirely correct.

My argument is that any monetary item, whether it be currency, bearer bonds, stocks, gold, diamonds, or whatever else, must be tradable for some real value. As I argue this more and more, I realize why real estate is called real estate. The only other things of real value I can think of are labor and food. (And when you get down to brass tacks, food is really just the combination of land and labor. But sometimes you need it now.) I'm more than happy to add art into that category, too, although I suppose that could be considered as a form of labor.

I don't believe that currency necessarily needs to have a fixed value. There are a huge variety of variables involved. But it does need to be tradable for one of those few ultimately valuable things. The basic notion is that, in a capitalistic world, if you do something for me, I do something for you. If you plow my fields, I'll let you keep some of the food. But as society becomes more complex, the tit-for-tat might not be coincident, so you need an IOU, which is essentially what currency is, once you allow the notion that I can sell the potential service or good that you were going to give me to someone else in order to get him to do something for me. It's just an easier way to keep track of "Andy plows Bob's fields; Bob builds Chuck's house; and Chuck makes Andy's shoes." And then, at some point, it progresses to the point where Dave has an IOU for barrel making and Earl has an IOU for lumberjacking and they both need what the other has, so they trade, without either one having done any work or provided any goods.

(I've regressed to the fiduciary precambrian here.)

So, to skip ahead 5000 years, when I give a company my IOU, it's with the expectation that they give me either labor, goods, or another IOU in return. In the stock market, what they give you is the notion of partial ownership. And if the company doesn't pay dividends (the equivalent of making you a new pair of shoes, or at least an IOU for new shoes, every year), then you don't get anything else back besides the partial ownership. You cannot do anything with that partial ownership besides point to it. The company will never do any work for you, they will never give you any goods, and they will never give you an IOU.

But, you argue, you can sell that partial ownership (which will never produce anything for you) to someone else, and he'll give you a good, service, or IOU for it. Which I am not denying. Certainly people will do this. And they will do it because someone else will do it for them. But they're just passing around this partial ownership that will never produce any good or labor or IOU on its own. Which makes me wonder why anyone wants to buy it.

And as you all point out, because someone else will buy it. But it all seems like the Emperor's New Clothes to me. Everyone just arbitrarily agrees that it's worth something. (And they make an interesting game out of what that worth is attached to.) But it has become completely disconnected from what made things worth something those 5000 years ago.

On IRC, Tony was making a comparison between stocks and certificates of deposit, nearly equating them. His argument (and I apologize if I've misinterpreted) is that in both cases, you give money to someone else, time elapses, then you get more money in return. (Well, in the case of the stock, you hope you get more money.) But the problem with that argument is that, while that's true for the individual investor, it's not true once you look at the system as a whole. The CD's system is incredibly simple. Investor pays company some amount of money, time passes, company pays back money, plus interest, to investor. And the system is finished. The CD no longer exists. In the case of the stock, investor 1 pays money to company, time passes, investor 2 pays money to investor 1, time passes, investor 3 pays money to investor 2 ... investor n pays money to investor n-1. It's an infinite loop. If any of you computer scientists out there turned this algorithm into your employer as the basis for a multi-billion dollar organization, you'd get fired.

In my mind, what this all means is that someone's going to be left holding the bag -- I mean hot potato -- I mean stock certificate -- when whatever the Ctrl-C equivalent is happens. I guess part of the risk, in addition to the question of if the company's assets will appreciate, is the question of when the crash will happen. And I guess I see all of those options as dickish.

Of course, that's way off my initial point, which is, if it is all based on an infinite loop with the only possible outcome being collapse, where does the value come from? Actually, even that's not my initial point. It's really more along the lines of, if the company never gives any proceeds to the stockholder, why is the stock value associated with the value of the company?

I know I've gone off on a dozen tangents, and I know you're all frustrated with my apparent denseness, but I can assure you that I'm not being dense (well, other than ignoring dividends, and I see how I'm being dense there). I'm equally as frustrated with all the arguments that are looking at what I see as a tiny subset of the whole system and the apparent refusal to look at the whole thing. At this point, I don't know if I'm trying to convince you that it's a huge case of the Emperor's New Clothes, or if I'm really hoping that someone can show me why anyone would find worth in something that will never produce anything of value.

If someone would just come out and say that it's the ultimate hope of every stockholder that every stock they invest in will one day pay large dividends, then that would make sense to me, even if each stockholder is only trading it based on that potential gain. Otherwise, it's just trading baseball cards, but without all the cool pictures of the players or the bubblegum.
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Bitt Faulk

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#277832 - 23/03/2006 03:18 Re: Stock Market [Re: wfaulk]
loren
carpal tunnel

Registered: 23/08/2000
Posts: 3826
Loc: SLC, UT, USA
Bitt, maybe you should get some shares in the M+M syndicate
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#277833 - 23/03/2006 03:25 Re: Stock Market [Re: loren]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Hee! I was giggling about this just a few hours ago:

Quote:
I want to serve this to the men. Taste it and let me know what you think.

What is it?

Chocolate covered cotton.

What are you, crazy?

No good, huh?

For Christ's sake, you didn't even take the seeds out.

Is it really that bad?

It's cotton!
_________________________
Bitt Faulk

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#277834 - 23/03/2006 06:02 Re: Stock Market [Re: wfaulk]
genixia
Carpal Tunnel

Registered: 08/02/2002
Posts: 3411
I find your lack of faith..... disturbing.

Sorry, I don't know why that quote just popped into my head.

In all seriousness though...you're right with most of the tangental points that you just made. But looking for answers beyond that is kinda like looking for the meaning of life beyond 42 or Monty Python.

I will take exception to
Quote:
The basic notion is that, in a capitalistic world, if you do something for me, I do something for you. If you plow my fields, I'll let you keep some of the food....

What you describe there isn't necessarily capitalistic. It just as easily be socialist, "From each according to ability, to each according to need." Andy can plow fields and needs shoes. Bob can build houses and needs his fields plowed, and Chuck needs a house and can make shoes.

What you descibed there was simply the barter system, nothing more, nothing less.

The underpinning of capitalism is a free market, ie the ability of the market to determine the value of an item through supply and demand. And for that to occur you need some uniform unit of measure to describe that value, because it gets mightily inconvenient to keep tabs of how many pairs of shoes your house is worth. Hence the abstraction of value starting around 1100BC with the introduction of currency.

The stock market is that abstraction taken to the Nth degree. You question the value of holding a piece of paper issued by a company, but as pointed out previously, that is little different to holding a piece of paper issued by the Government. Just look at 1930s Germany. People were collecting their wages in wheelbarrows. Before long they were dumping their wages to barter the wheelbarrow. Does that make currency inherently valueless to you too?

Quote:
Of course, that's way off my initial point, which is, if it is all based on an infinite loop with the only possible outcome being collapse, where does the value come from?

Because its not all an infinite loop with collapse being the only outcome. Stable companies in stable business sectors pay dividends. Look at utility companies. Look at food companies. Eventually companies considered new and innovative today are going to stabilise and hit market saturation. When that happens they'll stop investing in themselves and start on the dividend treadmill. (Consider Ford and GE. Both were new and innovative in the early 20th Century. Today they pay dividends.)

As an aside, if you think about it another way, what would it say about the economy and technological progress if 100% of companies paid dividends? How big could companies get if they didn't invest in themselves? How much innovation and progress could a world of small companies achieve?

Quote:
Actually, even that's not my initial point. It's really more along the lines of, if the company never gives any proceeds to the stockholder, why is the stock value associated with the value of the company?

The stock value multiplied by the number of shares outstanding _is_ the value of the company as set by the free market. By definition. This is capitalism at its finest. We've somehow managed to measure the value of all the assets and infrastructure, patents and copyrights, expected revenue growth, expected profit, expected dividends, expected stock price gains, and every other tangible and intangible that comprises a corporation and abstracted it into one number which we can argue about.

If I think that the number is too high, then I can sell stock that I have, short stock that I don't have, or attempt to buy at a price lower than what I think it is worth, (I'll ignore derivatives here). If I think that the number is too low, then I can hold the stock that I have, or buy more, or try to sell at a price that is higher than what I think it is worth. In any case, my actions (or lack of) when added to everyone elses actions (or lack of), create the supply and demand that sets the number, and hence defines the value of the company.

Dividends are certainly an important part of the equation, but only part. Taxes come into it too. If I have a stock paying a dividend, I have to pay income taxes on that dividend. Each and every time. If I have a stock that is reinvesting and growing then I only pay long term capital gains when I eventually sell that stock. I'm in a fairly high income tax bracket now because both my wife and I work in tech which pays well. Deferring dividends in favor of long term capital gain would be advantageous at this time. In X years time one or both of us may be retired, or we may pursue a career change that results in us falling into a lower tax bracket. At that time, dividend-yielding stocks will be more valuable to us than they are now. At that time it would make sense to sell those growth stocks and invest in income stocks. Income stocks are also advantageous at that point because they are associated with stable companies in stable business sectors. The last thing you'd want to happen is to be dependant on volatile growth stocks for your income during a downward market correction.

Of course, the goverment may change income and capital gains tax rules and rates now or at any point in the future, so that's a gamble too.
_________________________
Mk2a 60GB Blue. Serial 030102962 sig.mp3: File Format not Valid.

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#277835 - 23/03/2006 11:43 Re: Stock Market [Re: wfaulk]
Anonymous
Unregistered


Quote:
As I argue this more and more, I realize why real estate is called real estate. The only other things of real value I can think of are labor and food. (And when you get down to brass tacks, food is really just the combination of land and labor. But sometimes you need it now.) I'm more than happy to add art into that category, too, although I suppose that could be considered as a form of labor.


LOL, art? So random paint strokes on a piece of paper (which is considered art nowadays) has real, tangible value, but not things like hammers, rifles, shovels, computers, cars, technology, and certificates of partial ownership of companies that provide these things a.k.a. stocks?

Sorry, but I would argue exactly the opposite. The Mona Lisa may be worth millions but it'll never live up to the tangible value of a $5 hammer.

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#277836 - 23/03/2006 14:01 Re: Stock Market [Re: genixia]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Quote:
I find your lack of faith..... disturbing.

Hah!

Quote:
The underpinning of capitalism is a free market, ie the ability of the market to determine the value of an item through supply and demand.

I'll readily admit I glossed over points in my paragraph-long explanation of the origins of currency, and, while I agree with what you say in regards to capitalism vs. socialism, I think you're avoiding my point. Just add in the phrase "an equivalent amount of" at appropriate points in my post. I think that socialism is well outside the scope of this argument. We're talking nearly pure capitalism in regards to the stock market, and the influence that government has on it looks to be insignificant in regards to my basic question.

Quote:
You question the value of holding a piece of paper issued by a company, but as pointed out previously, that is little different to holding a piece of paper issued by the Government.

That's very true, but the collapse of the government is a much bigger deal than the collapse of a company. I was reflecting on my own post and some of the issues involved in the Gold vs. Silver battle as suggested by Dan last night and was thinking about that exact fact, actually. As far as I can see, stocks are basically currency printed by companies instead of the government. And I guess, on some level, I question the right of those companies to issue currency. On a lower level, I question the right of the government to print currency. (Maybe I'm less of a socialist than I thought and more of an anarcho-syndicalist.)

Quote:
When that happens they'll stop investing in themselves and start on the dividend treadmill.

I'm going to take this as my "dividends are the final return" answer. I guess my issue with that is that it seems like investing in stocks for their dividends is very much a small part of stock investing. Maybe I'm wrong. On the other hand, Microsoft would seem to be a well established company in a well established sector with billions in the bank, and they do pay dividends. At a rate of 1.33%. If my calculations are correct, that means it would take 53 years to pay off. Of course, I'm intentionally ignoring the case where someone bought it in 1986 for $21. So it seems that the answer really, ultimately, is that investors bet that dividends will pay off more than they invested in the company.

Quote:
As an aside, if you think about it another way, what would it say about the economy and technological progress if 100% of companies paid dividends? How big could companies get if they didn't invest in themselves?

If I give you $100 and you pay me back $3 every year, you still have a large portion of that money for a long time.

Quote:
The stock value multiplied by the number of shares outstanding _is_ the value of the company as set by the free market.

No, that is the potential value. My company was once trading at something like $20 a share. When it got bought out, it was at like $0.15 a share. According to your definition, both of those are the value of the company. Unless we're going to get into quantum finances, both of those can't be true.

At the same time, if you look at the stock market as betting on how much a company will eventually pay in dividends, other than semantic quibbling (which, don't get me wrong, I'm more than happy to do), this is the obvious explanation for how it all works.

The problem with that is that no one (here, at least) will commit to dividends being the ultimate reward.
_________________________
Bitt Faulk

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#277837 - 23/03/2006 14:07 Re: Stock Market [Re: ]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Quote:
So random paint strokes on a piece of paper (which is considered art nowadays) has real, tangible value, but not things like hammers, rifles, shovels, computers, cars, technology, and certificates of partial ownership of companies that provide these things

I don't know why I'm bothering to respond, but yes.

People desire art. And art is well more than "random paint strokes on a piece of paper", as you well know. Have you ever paid money to see a concert or a movie? If so, you've disproved your own point. Even if you haven't, you cannot deny that a huge number of people do, in addition to buying books and fine art, and watching TV, and whatever else it is that people do that has no tangible gain. As someone once said, art is everything you do that doesn't help you live.

And the idea that you will ever see the assets of the company you own stock in exactly the thing that I'm arguing doesn't happen. In addition, if you're arguing that the real value of a company is tied up in the physical things it owns, I've got a bridge I'd like to sell you. You know that computer that you paid $1000 for three years ago? How much is it worth now?


Edited by wfaulk (23/03/2006 14:09)
_________________________
Bitt Faulk

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#277838 - 23/03/2006 15:17 Re: Stock Market [Re: wfaulk]
DWallach
carpal tunnel

Registered: 30/04/2000
Posts: 3728
Something to consider: if you'd bought Microsoft stock at its IPO in 1986, at $21/share, you would have experienced stock splits amounting to 288:1 from then to the present day. If I'm doing the math right, then each of your original shares, purchased at $21, would now be paying you $103.68/year in dividends. (And, the market value of each of those original shares, today, if there weren't any stock splits, would be $7712.) Sure, you had to wait nearly two decades for the payout, but getting 5x your original investment as a dividend, every year, sounds like a hefty reward. If you ignore the dot-com market bubble, the long-term chart of Microsoft's stock shows a remarkably steady growth in its price, which is fairly easy to justify, given the present dividends.

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#277839 - 23/03/2006 16:38 Re: Stock Market [Re: DWallach]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
And that's a good point, except the part about the market value of the original shares. The market value should be what they're worth right now, right? Waiting 20 years to get 500% rewards seems reasonable. Very reasonable. But buying now and not breaking even for 50 years wouldn't seem to support the current market value.
_________________________
Bitt Faulk

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#277840 - 23/03/2006 17:09 Re: Stock Market [Re: wfaulk]
DWallach
carpal tunnel

Registered: 30/04/2000
Posts: 3728
Okay, here's the part where you have to be comfortable with abstraction. If you can buy an "investment" now (let's not worry about what it actually is, yet) that will give you a series of payouts in the future, then it's straightforward to compute the "present value" of that future payoff (mathematically, it's just like mortgage payments -- you adjust the future payments backward based on an assumed inflation rate). As you get closer to the beginning of that series of payments, the value of the underlying investment necessarily increases, because the payments are coming sooner in the future (or, there's less of a discount due to inflation).

Stocks are a little more complex than this because of volatility / uncertainty. There's some chance that there won't ever be a payout, so you're (rationally) only willing to buy the stock if the payout is proportionally higher, and thus worth the risk. (That's what Black-Scholes is all about.)

Still, if you're willing to believe that it's rational to buy stock now because of a payout two decades hence, then you necessarily must believe that the underlying value of the stock increases over time, based on the increasing present value of those future dividends, as estimated by the players in the market. The only way that this breaks down is if you don't believe that the market is rational. Irrationality, of course, causes all kinds of chaos in the markets, but it also creates opportunities for rational investors who wait for irrational behavior to depress stock prices below their rational value.

And, back to Microsoft, the reason that Microsoft's yield is lower than, say, Ford, is because (rational) investors are betting that Microsoft will continue to grow, and thus their dividends will continue to grow. If Microsoft gets back on its previous exponential growth curve, then the current stock price (and dividend yield) look like a bargain.

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#277841 - 23/03/2006 18:04 Re: Stock Market [Re: DWallach]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Quote:
If you can buy an "investment" now (let's not worry about what it actually is, yet) that will give you a series of payouts in the future

I'm still waiting for someone to commit and say "the endgame for stock purchasing is dividends"....

If that's the case, I get it. However, I'd be very interested in looking at all the non-dividend-paying stocks on the market, say, 20 years ago and seeing how many of those have started paying dividends since then and how much those dividends paid out as a percentage of the stock's market price at the time of purchase. I seriously doubt I can get my hands on that sort of data, though.
_________________________
Bitt Faulk

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#277842 - 23/03/2006 18:20 Re: Stock Market [Re: wfaulk]
matthew_k
pooh-bah

Registered: 12/02/2002
Posts: 2298
Loc: Berkeley, California
You're grasping at the dividends vs reinvestment argument as the reason stocks are worthless. Dividends are one way to get money fron buying a stock. The company can also be bought out or be liquidated. Saying the stock is worthless in between those times is just being short sighted.

Matthew

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#277843 - 23/03/2006 18:38 Re: Stock Market [Re: matthew_k]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
Generally, buyouts are paid for with stock from the purchasing company. Not always, but most of the time, it seems. Assuming one does hold stock in a company, and that company gets bought for cash, do I get my percentage of that cash?

Liquidations are just selling off assets when the company would otherwise have closed doors, right? I'd be surprised to find that those assets were worth more than the stock was purchased for. If they were, they probably wouldn't be closing doors. Of course, there's the possibility that I bought the stock when it was a small company, it got big, and then foundered under its own weight. I might get more out of it than I paid for it in that case. (Of course, that assumes that the assets were sold for cash and not just more stock.) At the same time, that seems to run contrary to the notion that a company's stock is worth more when it's doing well.

At the same time, at least we're now getting down to answering my initial question. And these are all getting to be reasonable answers: dividends, cash buyouts, and cash liquidations.

Quote:
Saying the stock is worthless in between those times is just being short sighted.

I'm not saying that. Between those times, the stock has potential worth. My whole question all along has been "what is the basis of that potential worth".


Edited by wfaulk (23/03/2006 18:40)
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Bitt Faulk

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#277844 - 23/03/2006 18:46 Re: Stock Market [Re: wfaulk]
matthew_k
pooh-bah

Registered: 12/02/2002
Posts: 2298
Loc: Berkeley, California
Knight Ridder was my previous example of a liquidation, and it was still profitable, just not profitable enough. An investor bought a controlling stake, and sold the entire thing off and presumably will distribute the cash to the stockholders.

Corporate raiders (See: Carl Icahn) buy companies and sell off the individual parts for a sum total of more than the stock is worth. Generally this would involve splitting up a conglomerate and selling the various pieces to companies that would get greater value out of owning that piece than the conglomerate did.

Matthew

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#277845 - 24/03/2006 01:03 Re: Stock Market [Re: wfaulk]
genixia
Carpal Tunnel

Registered: 08/02/2002
Posts: 3411
Quote:

Quote:
The stock value multiplied by the number of shares outstanding _is_ the value of the company as set by the free market.

No, that is the potential value. My company was once trading at something like $20 a share. When it got bought out, it was at like $0.15 a share. According to your definition, both of those are the value of the company. Unless we're going to get into quantum finances, both of those can't be true.


No, that is absolutely true - the company is worth exactly what someone is prepared to pay for it at any time. (Just like anything else). Now a stock can't be worth $20 and $0.15 at exactly the same time, not in the same universe anyway. But a stock can change in value very quickly.

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At the same time, if you look at the stock market as betting on how much a company will eventually pay in dividends, other than semantic quibbling (which, don't get me wrong, I'm more than happy to do), this is the obvious explanation for how it all works.

The problem with that is that no one (here, at least) will commit to dividends being the ultimate reward.


Ok, I'll commit to that. Without the promise of dividends, the stock would have little value. The only value left would be to gain control of the company.

And this explains the $20 to $0.15 value changes. The moment a company looks as if it won't ever be able to make a profit and pay a dividend, all you are left with is the underlying value of tangible assets which generally isn't worth much when you divide it by millions of shares.
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#277846 - 24/03/2006 01:48 Re: Stock Market [Re: genixia]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
What I'm saying is that unless you want to say that there are multiple futures for a company, only one value for the total worth of a company can be true. It might have a different market value (after all, people are willing to buy used items on eBay for more than they can buy the same thing new retail), but there is only one true value. But at the time of purchase you don't know what that's going to be, so you buy it for what you think that value will be. (Or, hopefully, you get a deal and buy it for less.)

To put it at a more concrete example, if you could magically, instantaneously, purchase all of the stock of a company at the market price, you'd own that company. But it would be stupid to do so unless the real value of that company was more; if it wasn't, all you'd be doing is moving your money from your bank account into the company and back into your bank account at some other time, all without any profit. But you can't really do that instantaneously, and that works out well for the marketplace, because that frantic buyup tips off other people that they should buy that stock, too, which drives up the price, and then you stop buying when it gets to the point where you won't make money anymore.

What I'm getting at is that the market value and the ultimate correct value of a company are two different things. The stock market works to make the market value be the consensus of what people think the ultimate value of the company will be, but what they think is not (necessarily) the same as what will ultimately come to fruition.

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Ok, I'll commit to that.

Woohoo! Where'd that Kool-Aid get to?
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#277847 - 24/03/2006 08:31 Re: Stock Market [Re: wfaulk]
julf
veteran

Registered: 01/10/2001
Posts: 1298
Loc: Amsterdam, The Netherlands
Quote:
What I'm getting at is that the market value and the ultimate correct value of a company are two different things. The stock market works to make the market value be the consensus of what people think the ultimate value of the company will be, but what they think is not (necessarily) the same as what will ultimately come to fruition.


I think we all agree with that statement. That doesn't imply that speculating with the shares of the company isn't potentially profitable. We can then have long discussions about how ethical that is, and if it is a good or a bad thing for society in general, etc., but that is another question.

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#277848 - 24/03/2006 11:03 Re: Stock Market [Re: wfaulk]
Anonymous
Unregistered


Quote:
... only one value for the total worth of a company can be true. It might have a different market value (after all, people are willing to buy used items on eBay for more than they can buy the same thing new retail), but there is only one true value.


The value of something is subjective, and it depends on time and place.

The people buying items on ebay for more than they are supposedly worth may not have that item available for sale in their area. Ebay helps take the 'place' out of the equation.

A Nolan Ryan rookie card may have been worth 15 cents during his first season in the MLB. It's worth a lot more now. In a thousands years, baseball might be a forgotten sport and it might be worth nothing. Which is the 'true' value? The true value is what someone is willing to pay for it right now.


Edited by Billy (24/03/2006 11:08)

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#277849 - 24/03/2006 13:54 Re: Stock Market [Re: wfaulk]
genixia
Carpal Tunnel

Registered: 08/02/2002
Posts: 3411
If I were to accept that assertion, how would you measure the total value of a company? Who decides how valuable those 3 year old computers are, how valuable the patents are? How valuable the owned real estate is? The company may assert its understanding of those values, and will do so frequently in financial accounts, but as we have seen, accounts are often restated. Those computers are likely being depreciated by the company, with the depreciation being written off against income. So the company has some idea of what its value of the computers is, but if it were to turn around and sell them, then it might find out that their depreciation model doesn't fit the market for 3 year old computers. What about intangibles such as market share, brand value and employee productivity? Can you measure their value independantly? Again, the company might try to assign a value to those, and again, could very well be wrong. Any value assigned to any component part of the company is open to debate.

My point is that there is no truer value for the company than the one decided by the market, and that value is usually many times the sum of the individual market values of the underlying tangibles. (That's what prevents corporate raiding.) Even when the market appears to be fickle and volatile, that is true.

Here's an analogy.

Supposing you bought an... ipod. A nice 60GB color screen model for $300. Now the individual components may cost Apple $150, but the market value is $300. Do you consider the true value to be $150 or $300?

Now, supposing that the next day, another company enters the market with a 200GB mp3 player that is better in every respect. The kicker is that this other company somehow manages to sell them for $200. Is your ipod still worth $300? I think that you'll agree that it isn't, even though the value of the individual components hasn't changed overnight. If you could get $200 for your 1 day old ipod, then you might be tempted to sell it immediately in order to buy the new player.
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#277850 - 24/03/2006 14:41 Re: Stock Market [Re: genixia]
wfaulk
carpal tunnel

Registered: 25/12/2000
Posts: 16706
Loc: Raleigh, NC US
But you're talking about two different things. In the case of an iPod, you're basing its value (at least partially) on its utility, much of which is very subjective. In the case of the stock, since it has no inherent utility, you have nothing to base the real value on besides the amount of money it pays out to its investors over time, including dividends and whatever happens with the final disposition of the company. You cannot know that value until the stock no longer exists, so people speculate what that ultimate value will be and try to buy for less than that.

To be clear, I totally agree with you that the current market price of the company is determined by the stock price. But what that piece of stock is ultimately worth is a different amount.

There is a difference between cost and value. The stock market tries to make the cost equal the value, but it's not exact. Let's take the example of a company that was at one time trading for $20 a share, but gets bought out for cash at $1 a share. Those people who bought at $20 paid fair market value at the time. But they ultimately only recieved $1 back. The cost was $20, but they bought something that had an ultimate value of $1. (It's possible that that might be advantageous to them after the fact for some reason -- taxes, probably -- but on its own, it shows that cost and value are not the same thing.)
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#277851 - 24/03/2006 15:27 Re: Stock Market [Re: wfaulk]
Anonymous
Unregistered


Quote:
Those people who bought at $20 paid fair market value at the time. But they ultimately only recieved $1 back. The cost was $20, but they bought something that had an ultimate value of $1. (... it shows that cost and value are not the same thing.)


Again, value depends on place and time. And value is always subjective, determined by you and the highest bidder.


Edited by Billy (24/03/2006 15:29)

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