Re:Why is the stock market rallying when the economy is so bad?
by kerkeslager on Monday May 11, 2020 @09:09PM
(#23149492)
> But the farther away any trader gets from fundamentals -- e.g. buying something they already think is overvalued because they think it will continue to climb -- the statistically riskier it is and the more likely they'll lose money.
How? By what mechanism?
The fact is, as long as shares of the company don't actually get removed from the market entirely, the price of the shares is what people are willing to pay for them.
This is a common trope to hear, but it's just so fundamentally untrue.
At the end of the day, the long-term fundamental value is absolutely tied to dividends/buybacks. There is zero divorcing from that reality.
Yes, in the short term prices fluctuate above and below that level based on supply and demand for shares and other trading strategies. But the farther away any trader gets from fundamentals -- e.g. buying something they already think is overvalued because they think it will continue to climb -- the statistically riskier it is and the more likely they'll lose money.
So there is a strong force pushing the value of a stock to exactly the NPV of its future profits.
Going without regular dividends or buybacks is not just fine and perfectly normal for growth stocks, but expected because it's in shareholders' best interests. You don't need dividends to be able to judge revenue, costs, and profit. Everybody knows that when the companies cease to continue growing and reach a "steady state", the dividends/buybacks spout will be turned on. Not out of the company's good will, but because shareholders will demand it.