So a few people have tried to respond to my last post, and have found that they ... can't.
That's because, I just realized, I got completely overwhelmed with blogspam, and until I have a chance to upgrade to MT 3.0, or install a few functions that will take care of this for me, I'm just blocking everything.
So that means that an entry that includes anything matching the regex ".*" gets blasted.
Sorry, no comments today.
I still don’t get the stock market. (This post inspired by starting to read the rather well-written Wall Street [thanks, CT and needing to test an assumption or two.)
Note: The following will prove that I'm not an economist.
(Oh, and sorry about the lack of posting).
I think I’m a pretty smart guy. I can understand futures and options (and, indeed, futures on options). I know what a derivative is, even if I don’t want to buy any, and can kind of grok some of the more interesting financial tools out there. At least, I can understand them as long as I stick to a single underlying axiom: a company’s stock price has something to do with the way the company is doing.
Now, this isn’t a terribly unusual belief: I hear it repeated on the radio a lot (“after the news that the CEO of company XYZ had a bad headache, stock prices fell”). But I just don’t get it.
The problem is, you see, there’s a certain degree of accountability disconnect. Let’s look at this:
A company sells stock, I have been assured, in order to dilute ownership in exchange for money. (Presumably, if they had more capital around, they’d sell bonds instead: those, after all, they are likely to get back in a predictable way.) When I buy a stock, I am getting a little bit of ownership in exchange for money.
Why might I buy a stock?
• I expect someone else may buy it from me for more money
• I wish to own part of that company in order to exert decision-making force
• I expect dividends to come out of the stock
• I expect the company to be sold to someone else (or liquidated) for cash and assets; I want to get at that cash
I would claim that we can eliminate the first of those as the ‘greater fools’ theory. Since we’re trying to figure out what the market is about, the first of those really shouldn’t affect anything. After all, if we believe rational economics, that greater fool knows something. Or thinks he does. And that something had better be one of the latter points, or the whole house of cards is going to collapse. (If the stock market really runs in large part on psychology, as this article seems to suggest, then the idea of counting on it as a long term investment vehicle for anything: social security, my future, whatever, seems incredibly … well, stupid.)
As for the decision-making: well, Google just IPO’d with such incredibly dilute common stock that investors will never have a meaningful vote. Heck, it was announced as such in the prospectus. The owners are holding onto more than 50%. This means their vote doesn't count. Yet they bought the stuff. Indeed, most people who buy are getting virtually no decision-making power for their purchase.
Dividends? Microsoft is now releasing dividends quarterly, around $0.08 per share. If you figure this will keep up forever, that’s a 1.62% continuous interest rate. I’m not impressed with this as a return on anything, especially in a market that likes to see 5% -- or 10%, or 30% -- gains.
Sold? The only way any company gets sold or liquidated is if it fortunes plunge. And, well, the value goes down when fortunes plunge. Anyway, common stockholders often see very little after the meat of the corpse is taken apart. Certainly, the chances that anything is going to happen to Google that would put $193 into each shareholder's hand is pretty unlikely.
So what’s left? What is it that changes in the world when a piece of news (“Executive XXX announces tweak to product line ZZZ!”). The market is overjoyed: clearly, something wonderful will happen! What is it? Will they start issuing dividends? Will the company be worth more if it’s ever taken apart? Is this a probabilistic statement that the company is less likely to fall apart, or a value statement of what it’s worth today? What about bad news? Ford sells Firestone tires, which are found to be defective. Ford’s stock price slips a little. Why? Sure, Ford will have to shell out some money to replace the tires, but we’re not expecting them to go down, are we? Rational Actor theory would suggest they go down by exactly the value of those tires they have to replace, plus the goodwill they lost. Of course, if I expect them to bounce back, I should just wait: sure, their present cash reserves are down a touch, but the company is still there. Unless I think this changes my expectations of its long-run value, I should hang in there.
And yet the market reacts excitedly, prices flipping up and down like there’s no tomorrow.
What am I missing? What’s the mechanism for the connection between the events that occur in a company’s life, and the shareholders’ willingness to buy or sell those stocks?
What I'm asking, at heart, is what keeps the whole "wisdom of markets" things going?