From: Forrest Bishop (forrestb@ix.netcom.com)
Date: Mon Sep 09 2002 - 21:25:37 MDT
----- Original Message -----
From: Dan Fabulich <dfabulich@warpmail.net>
To: <extropians@extropy.org>
Sent: Monday, September 09, 2002 4:10 PM
Subject: What does the stock market supply?
> So, I've been wondering something that I'm hoping one of the clever folks
> here can answer for me. I believe I have some false assumptions about the
> stock market, but I don't know what they are.
Misguided beliefs are a common, defining feature of speculative manias. The hucksters at the top of a pyramid scheme sometimes know
this, and most incredibly, often don't! Isaac Newton, Irving Fisher and J. M. Keynes each lost most of their fortunes in a crashing
market that they had helped create.
> When I buy stock in a company, I get some controlling interest in the
> company (normally, I get to vote on shareholder resolutions and whatnot),
> right? I'm having a hard time understanding how and why that's valuable.
Unless you have some particular expertise in the area of the company's business, voting probably doesn't do much to enhance the
company's survivability. Other reasons to vote may be to enhance the security of your investment, or guide the directors in some
ethical direction, this depends on the particular issue up for vote. The clout you have depends on % ownership as well as the type
(preferred or common) of stock, so get to know the views of the majority holders- they can override the minority interests.
> In my understanding of value, there are only two kinds of value: goods may
> be purchased for their intrinsic value to the purchaser, and goods may be
> purchased for their moneymaking value. (Here, I use "intrinsic value" to
> simply mean non-economic value.)
"Value" is one of those words that often gets misappropriated. "Intrinsic value" is a non-sequiter or a redundancy. Value in the
Austrian School sense is entirely in the eye of the beholder: it is subjective, individual, volatile, and fleeting. Though the
theory of subjective value has been argued over in past decades, it is completely in accord with everything we know from cognitve
science, psychology, and the entire body of scientific knowledge this side of parapsychology.
The distinction between the two kinds of goods you make above also go by different names in different economics schools. "Consumer
goods" are final-use items for the purchaser, he does not intend to trade out of them in the future- a determination made at the
time of purchase based on the buyer's scale of values at that same time.
The "goods [that] may be purchased for their moneymaking value" are investments, items not meant to be consumed in the near
future.. The same buyer that acquired the consumer goods may decide he is able to defer some of his consumption to a further date,
hence diverts a portion of his available resources into an investment. The dividing line is fuzzy, it depends on the time-preference
of the buyer/owner of the goods in question. An investment is always a bet, the investor is either betting he will need the goods in
the long-term or that someone else will that he can trade it to for the same, or more, than he traded out of for it. The primary
consideration of investing is return OF principle, not return ON principle, an investment maxim that seems to disappear into the
woodwork during a speculative boom driven by "greater fools".
> Examples of goods purchased for their intrinsic value might be toys,
> housing, and medicine. Examples of goods purchased for their economic
> value might include tools, vocational education, and interest bearing
> loans. (Of course, the distinction is rarely stark; sometimes you buy a
> nice house so as to sell it when demand for the intrinsic value of your
> house rises, education may be had for the pleasure of it, etc.)
>
> [Here's where I'm especially unsure of my assumptions.]
The notion of intrinsic value vs. economic value is completely submerged in the subjective value theory. The distinction obscures
more than it clarifies. No thing has intrinsic, stand-alone, objective value, its value is contingent upon external market factors-
determined at the point of prospective sale/purchase- as well as on the owners disposition at a specific time and place.
> Now, it doesn't seem to me like shares of a firm have any intrinsic/
> non-economic value worth considering (?), but rather people only purchase
> them w+ith the intention of making money with them.
> But, unlike tools that you can use to build things that make money, or
> education that you can use to increase your productivity or expand your
> money-making capabilities, or loans which make money in interest, [by
> enabling other people to buy tools/education/capital, improving their
> money-making capacity and passing some of the difference on to you,]
> stocks don't appear to *do* anything that make them worth paying for.
>
> Indeed, the primary way people intend to make money off of stocks is by
> selling them.
The stock of any company over the long term is only worth what that company can earn over the long term. Buying with the intention
of quickly selling (flipping) is a speculative bet: you are gambling that someone in the future will buy it off of you. This has
nothing whatsoever to do with the real-world operation of the underlying business.
> But this just begs the question as to why anyone would want
> to buy them in the first place!
To have an asset that can produce futher assets in the future. In a stable economy the aggregate monetary return (ROI) on all stocks
cannot exceed the spacetime-averaged real interest rate (called the originary rate, which has been very roughly 3% in the US 1990's)
> Of course, you CAN make money off of a stock by receiving a dividend.
> But it's well understood that you don't buy stocks *so that you'll get a
> dividend*; instead, you buy stocks so that you can reap the rewards when
> their price goes up (ie, when other people are more interested in buying
> your stock). The reward of owning stock is therefore realized only when
> the stock is sold.
The above is a false assumption. The part about "it is well understood"- where does this come from? CNBC? Moneyline, IBD, WSJ? It is
a myth, the same "greater fool" myth promulgated in every financial mania of record.
> Even if dividends *were* the only way in which stocks could make money for
> their bearers, then there's a huge number of stocks out there whose value
> cannot be explained, because they do not offer dividends and do not intend
> to offer dividends anytime soon, if ever. If dividends were the only way
> a stock could benefit its bearer, these no-dividend stock prices would be
> totally inexplicable.
They are completely explicable as a symtom of a speculative mania. The same kinds of companies appeared during the South Seas
Bubble, the 20' boom, etc.
> If stocks have no intrinsic value, then stocks are radically different
> from other kinds of investments, even from other non-loan investments like
> real estate, where it's presumed that the real estate itself is worth
> having, for intrinsic reasons. Instead of trading stock, we might as well
> be trading certificates for chewed gum or anything else with no intrinsic
> value.
There is no such thing as intrinsic value. The stock certificate represents title to the underlying asset just as a land title is
for a piece of RE. Each of those underlying real assets in turn generates wealth (or losses).
> This last conclusion seems so wrong that I'm sure I must be missing
> something... but what? Am I overlooking the intrinsic value of voting in
> shareholder meetings? (I suppose it could give people pleasure to know
> that they're partially controlling the resources of a big business, even
> if they don't get any of that money for themselves...?) Or am I
> overlooking some other way, besides dividends, that stocks could make
> money for shareholders?
> In other words, what do stocks supply?
A unit of stock is a % claim of ownership on an undifferentiated portion of the assets of an enterprise, and a % claim (depending
on the type of stock) on the net monetary earnings of that enterprise.
> And, as a related question: why would a firm's shares be worth more, all
> else being equal, if the firm's profits increase?
Because the firm pays a higher dividend on earnings. All else being equal, the share price would then rise until the dividend yield
falls to match the originary interest rate.
Hope that helps,
Forrest
-- Forrest Bishop Chairman, Institute of Atomic-Scale Engineering www.iase.cc
This archive was generated by hypermail 2.1.5 : Sat Nov 02 2002 - 09:16:54 MST