From: Dan Fabulich (dfabulich@warpmail.net)
Date: Mon Sep 09 2002 - 22:50:47 MDT
This is the answer I've often received, so I'm interested in probing it
further, because, as far as I can tell, I don't understand it at all.
[The other answers I'd received thus far generally agree with my
assessment, but doesn't resolve my confusion as to how the market works.
I'm not yet ready to jump in with Crocker and conclude that everyone
participating in the stock market is irrational.]
Brian Atkins wrote:
> Forget about the voting rights, they are generally worthless unless you
> own a huge chunk of the company. Stock (do you believe a company has an
> intrinsic value?) does have intrinsic value. The problem is, it is
> constantly changing and is essentially equal to "what someone will pay for
> it right now".
You're not using the word "intrinsic" in the sense I used it. I used it
in the sense that things have "intrinsic value" have value in keeping,
having and using them, like toys and medicine. In this definition, things
that have value *merely* by their capacity to make money don't have
"intrinsic" value in the sense I mean.
I find this distinction helpful, because I view all of this economic
activity as the process of acquiring what has intrinsic value. We'd never
do all this trading, buying, selling, working, etc. unless at the end of
the day we were getting something out of it that was of *intrinsic* value
to us; it's those things that I try to keep an eye on in the process of
economic analysis.
> It is an alternate form of very liquid currency... so while you can't
> live in it like a house, you can generally sell it instantly if
> necessary. Or if you are the company itself you can use it to pay for
> things (like buying other companies). So to reiterate: it is not much
> different than a house (worth something because someone will pay you for
> it later) except you can't live in it but you have much better liquidity
> (assuming it's a public company).
Currency is more like a tool than stocks are. When you have a tool, you
can do things that you can't do without it. When you have a certain
currency, you can do things that you can't do without it; in most
countries, you *must* do some things with it or you'll be thrown in jail.
(e.g. you must pay US taxes with US dollars.)
But what can you buy with a stock that you can't buy without it? Nothing,
as far as I know.
So why would I want it? To sell it again? Why would anyone buy it from
you? To sell it again? Why would anyone buy it from *them*?
If the *only* value of a thing is in getting it off your hands, then, as I
say, we might as well be trading certificates for worthless things, like
chewed gum.
Indeed, it's easy to imagine a chewed gum derivatives market where
everyone played only because they thought that everyone else was playing;
where the operating assumption was that somebody else would want chewed
gum more than they do. The price of chewed gum would rise and rise,
inexorably.
Is THAT what the stock market is like? Feedback effects out of control,
as people "create" demand by imagining that other people have high demand?
Why doesn't everyone see that nobody has any demand for a stock
certificate, just like how nobody has any demand for a chewed gum
certificate?
Of course, chewed gum certificates could serve as an adequate currency.
Maybe that's the point I'm overlooking? That anything worthless can stand
for a currency? But then, why would this currency be at all tied to the
firm's performance? Surely we can all pretend that Enron certificates are
of value, and trade them like currency, even if Enron goes out of
business...?
> Stock does not do anything to make it worth paying for; the company does
> (which in turn affects the stock price). If the company does something that
> makes it theoretically more valuable, then the stock is worth more.
Why? The share [presuming no dividends] is still just a piece of paper,
doing nothing for me. Why would I want a company's stock more just
because they're growing? Why would I want to keep it more? Why would
other people want to buy it from me more?
> Why do you buy stock? As you say, you buy it because you think it will
> appreciate in value. Isn't that one of the main reasons to invest in a
> house? Otherwise it would be a simple luxury right?
Saying that things will "appreciate in value" is obfuscatory language.
When things appreciate in value, you mean that the demand for it will
rise; that other people will want it more. But if we all try to get a
thing just because we think that somebody else will want it more than we
do, then we're not doing anything of value to anyone; it's a shell game.
Nobody really wants it; we just think everyone else does, so we pass it
around like a hot potato.
Houses aren't like that. People *do* want nice houses in nice locations,
intrinsically. But nobody wants stock just to have it.
> BTW the value can be redeemed without necessarily having to sell the
> stock immediately. Similar to a house, you can use the stock as
> collateral for a loan, or you can barter the stock to someone in
> exchange for something. Or you can donate it to a charity, etc.
Yes, but that obfuscates the question of why anyone would want to buy it
in the first place... why would a charity want it? Why would anyone
barter me for stock? etc.
The universal answer to "why buy" can't *merely* be "because other people
will buy it for more." That's not a sane answer. Somebody has to
*actually want it*, not just think that other people do. :)
> As to your last question, in general the company is worth more when its
> profits sustainably increase, but not necessarily.
Yes, I know. But again, that obfuscates the question.
> For instance if it pumped up its earnings by selling off a valuable part
> of itself, it may not be worth more. Or like the current automobile
> companies, if they have to cut their long term financing rates to zero
> percent in order to keep making short term profits they may actually be
> worth less. The market generally discounts expected future events (some
> say 6 months out, but it varies... in 1999 the market was looking at a
> mirage very far out) when it attempts to put a value on a company.
Yes, I know. But the future "value" of a company's shares makes no more
sense than its current value. It complicates the problem, certainly;
instead of asking why I would want stock *now*, I would have to ask why I
would want stock *later* AND why I would want it *now*. But the point is
getting lost here: why would anyone want it, ever, at all?
I'm going to pick your last paragraph apart, not because I expect you to
answer every question, but so as to show how your answer didn't get to the
point of my question.
> The stock market supplies several things then: a way for anyone to see what
> the combined mental output of a significant chunk of humanity thinks a
> company will be worth in 6 months,
Why is a stock's price tied to a company's performance, if no dividends
are paid? The two have nothing to do with each other that I see.
> a way for anyone to try their hand at increasing their wealth by
> speculating,
You mean by tricking other people into thinking that OTHER other people
will want your good more than they do? It's not like they're speculating
on the demand or scarcity of a real good.
> an alternate currency for companies or individuals to use as they will,
As a currency, why would it have anything to do with anything's
performance? Why would it have anything to do with a firm's worth?
> a way for the original investors in a company to "cash out" the gains in
> wealth they made by making the original risky investment,
Why is getting stock worth anything to investors? Certainly I wouldn't
put down my hard-won earnings just in the hope of getting something nobody
wants.
> a way for companies to efficiently raise more capital when necessary by
> issuing additional shares, etc.
But why want it in the first place?
-Dan
-unless you love someone-
-nothing else makes any sense-
e.e. cummings
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