When all of the headlines are about GameStop and Nokia and AMC and some kid who made it lost a lot of money on RobinHood, the stock market can feel like a place for gambling. Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are ownership shares in real businesses instead of just another ticker symbol to gamble on.
Several times a week there are conversations on HN where commenters can’t understand how crypto currencies are different than stocks or how stocks are any different than gambling or why stocks can have any value without paying dividends.
I suspect many of those newcomers will be shaken out of the market during the next protracted drawdown. It’s unfortunate, because they stand to lose a lot over the course of a lifetime of investing.
This distinction is practically useless, unless you own enough shares to have even tiny sway at shareholder meetings. Owning 1/1000000000th of a company doesn't mean any extra value or power to you. The big difference between crypto coins and stock is that (some) stocks pay dividends. The ones that don't pay dividends are just speculative ticker symbols that go up and down in value--no difference from crypto names that go up and down.
With the state of the stock market companies can and do go under, but generally those doing something for people dont magically disappear overnight (like any crypto certainly can.)
That's it; that's the difference.
Crypto is mostly a store of wealth, similar to a currency. It's inherit value is that it is fungible, transferrable and scarce. Unlike other currencies, the supply is not at the whims of fed officials and politicians. The difference is that you can't pay taxes directly in crypto. I like it as a hedge.
Do you believe all currencies are pyramid schemes with no inherent value as they're based on nothing?
Currencies are not meant to store wealth. They are the exact opposite, a medium of exchange. From a macroeconomic perspective wealth can only exist in the real world. E.g. you own a house, a car or a factory. When you deposit money into a bank account, you are effectively delegating wealth and letting other people use your money to obtain wealth in your place. These people net a return because of their wealth and let you have a share of their returns.
When you hoard currencies like Scrooge McDuck then you are neither spending your money, nor delegating wealth management to other people. The money has been taken out of circulation.
Then there is the other side of money/currency, money is a claim to another person's labor, meaning if you fail to act on that claim the portion of labor that this claim represents has perished because of unemployment. The solution to this problem is inflation. If labor perishes, make the claim to that labor perish as well. If you do not want to lose purchasing power you will have to invest your money. Banks let you deposit and make your money available to those who are interested in investing on your behalf. You can also put your money into financial assets that directly represent physical wealth such as ownership of a company. If banks and financial assets fail, you can still invest your money yourself.
>Unlike other currencies, the supply is not at the whims of fed officials and politicians.
Considering the vast majority of cryptocurrencies meet their demise at the hands of their creators I'm not exactly sure where the difference is. A lot of cryptocurrency people talk about how the background of the team behind the cryptocurrency is very important.
If anything I would view it as a leveraged bet on the broader market.
So it's still a game, only for lower stakes in both directions.
With pump and dumps it is often not known who the beneficiaries are.
Some stocks that don't pay dividends (or buybacks, or reinvest) straight-up consume investor's capital.
Well, if a company was never going to issue dividends at any time in the future, or do dividend-alternatives like buybacks or a liquidation at the end of its life (not a normal option), or anything else, its shares would be worthless. I could actually imagine a tech company going out of business before its first dividend.
Downturns are events where many participants learn how the market really works.
It’s an ugly reality check, but thankfully we have them frequently. Otherwise you get really overbought and then events like the tulip mania/bubble happen.
Also, this isn't limited to stocks - back when whale oil was a thing, there were all sorts of booms and busts, depending mostly if a ship came in with or without a whale.
Instead of Wall Street analysts, there were people with telescopes to view the incoming ships as far from port as possible to gain an information advantage.
All of my research in this suggests this behavior is hardwired into human DNA and won’t ever change.
1. You can construct portfolios of derivatives that are almost equivalent to holding the underlying except at a smaller initial cost. This gives you nothing but flexibility in ownership.
2. Remember that fire insurance is also straight up gambling that your house will burn down. Gambling counter to your interests is what we call insurance, and the proper mix of underlying and derivative is a hedged, lower risk portfolio than just the underlying.
Except in very rare cases stocks are entirely based on what investors think someone else is willing to pay in the future.
Of course stocks are based on what investors think they’re worth. Thats the whole point. It’s not gambling. Tesla is worth a lot of money because people think it is. If you’re susceptible to fomo hype trains and looking for a quick buck, you’re looking at the market as a slot machine, no doubt.
Stocks pay owners other than their value in the market, too. Capitalists look to make money off the market. It doesn't mean it’s all gambling. That’s a little reductive.
On the other hand, it's worth gambling in stocks because if you don't your going to lose your shirt in the upcoming inflation, so you might as well roll the dice and shot your shit at not winding up poor.
Especially since there are tax increases targeted at the rich coming down the pike that are going to absolutely destroy you if you are middle class or poor, when a mcdouble costs $20 instead of $2 and the minimum wage is $100/hr instead of $15
We should have seen this drawdown last year.
If there is a discrepancy from that ideal then it means that something is going wrong, and the longer that discrepancy lasts, the more things are going wrong. Those wrong things will be discovered as soon as interest rates are back to their normal level.
Even if you guys would overshoot full employment your current president doesn't seem too frightened by the idea of taxing coins out of existence again.
Everyone can agree that Amazon is worth A Lot Of Money. The question is: is it worth $2T? or $3T? or $1T?
Don't get me wrong, in the timespan of an individual's life it may well make sense to heavily buy into this system. I'm just making the point that it's current form is rather new and appears loosely connected to the real world and is subject to change.
To me, the current stock market seems like a fiat currency without the threat of physical force. Maybe the temptation will be to increasingly merge government with large companies in order to keep the plates spinning.
Buying a stock is not lending money to a company. It's purchasing an ownership claim on future earnings realized by the company.
For AMZN, the expectation of its investors is that it should not realize substantial (relative to revenue) earnings now so that it can grow further and thereby increase the long-tail earnings to which shareholders are entitled.
GOOG, on the other hand, is returning money to shareholders now. In fact, they just authorized a program to return another $50B to shareholders. Our tax regime skews payout preferences, so that instead of paying dividends, some companies opt for share buybacks. But the net result is that cash is transferred from the company to its shareholders. You can see GOOGL's buybacks over time here, looks like they returned ~$31 billion to shareholders in 2020: https://ycharts.com/companies/GOOG/stock_buyback .
Which, as I said, can be realized via dividends or the sale of the company.
I looked up their dividend returns. It ain't much.
Keep in mind that tax law highly incentivizes the avoidance of dividends.
We'll see (or maybe not). This business of involving the general public in stock ownership is a new thing, it really is new ground to cover.
Keep reading my comment. Share buybacks are another way of returning cash to shareholders.
> involving the general public in stock ownership is a new thing, it really is new ground to cover.
There have been discount brokerages for 50 years now. I guess that's "new" as compared to how long there has been money, but I don't know that it's "new" in the sense that we can't determine whether buybacks do have the effect of returning cash to shareholders (they do). Share buybacks have been allowed since 1934.
Combining Biden's capital gains tax, Federal estate tax, Biden's stepped up basis for estates, Washington state's estate tax, and Washington state's new capital gains tax, the top estate tax rate is now 70%.
This ensures that tax planning will dominate investment strategies, which usually results in suboptimal investing and subsequently a lower performing economy.
It’s not something I know a lot about, but it seems likely that Congress will make substantial changes to Biden’s proposals?
The democrats have the government today. The most democrat heavy handed set of bills will ensure that republicans take a veto-proof majority of both houses. Different levels of watered down will have different effects. There is a reasonable chance that no matter what they do they will lose the house next election (even passing bills that the republicans would like to author but wouldn't dare!), but the exact set of laws they pass will have a big effect on both who shows up, and how voters change their votes.
Total shares outstanding plus outstanding stock awards:
Dec 2011 : 468 million
Dec 2012 : 470 million
Dec 2013 : 476 million
Dec 2014 : 483 million
Dec 2015 : 490 million
Dec 2016 : 497 million
Dec 2017 : 504 million
Dec 2018 : 507 million
Dec 2019 : 512 million
Dec 2020 : 518 million
It doesn't have to be that large a pool as percentage of the company.
At some point (perhaps now) Amazon growth is predicated on cannibalizing other companies. After all, the broad market can't exceed the GDP generally for the long term.
My primary point here is not to argue about investment concepts, merely to state a concern about the artificiality of it all. Financialization is real and rather spooky.
Most PROFESSIONAL stock pickers don't beat the market. And those that do, a tiny fraction can do it consistently over a 5-10 year time frame.
This is backed up by decades of data. But we still have millions of people who apparently think they are smarter than the thousands of professional stock-pickers who have MAs, PhDs and years of experience and do it full-time and still don't beat the market.
And sure, many average joes were wildly successful with GME or whatever the latest meme stock is. Just as many people made a ton of money in the last tech bubble. Check back in 5-10 years...
I'm counting on being luckier than those guys more than anything.
Any yes, what people on WallStreetBets are doing is gambling. Which is perfectly fine, I just wish more would acknowledge it.
From a valuation perspective, what's so wrong about that? You want to be on the side taking over the world. Otherwise you're on the side that's getting taken over, and the value of your equity logically trends toward zero.
They have a decent position in online retail, but they are very far from owning all of retail.
https://www.macrotrends.net/stocks/charts/KO/cocacola/pe-rat...
There are two ways that a P/E can return to a quasi-normal value. Either the price can go down or the earnings can increase.
The mean and median values, since 1880, are about 15.
"This time, it's different" https://www.multpl.com/s-p-500-pe-ratio
However, I'm not pulling out because realistically, there's no other asset that's safer in the long run. Interest rates are close to zero so returns in bonds are low, inflation will eat away money held in cash deposits and don't even get me started on cryptocurrency, rare sneakers or other "alternative investments". I started investing in stocks in 2017, even then people were warning that we were in a bubble that was bound to burst at some point. Not investing would have missed me several years of above-average returns.
But today, there seems to be a bubble on everything after all the money printing. So I'll keep investing in good, underhyped and stable companies and try to weather whatever storm, good or bad, will come in the next years.
This is the obvious strategy, reduce your risk tolerance and go with proven companies. Put your money (fresh from your bank account, not from your portfolio) into moonshots when you can afford to lose them, after that put the moonshot money back into your boring but relatively safe investments. There are low volatility or stable dividends ETFs that specialize in this.
KO has excellent margins - last time I looked they were around 60%. That means prices * sales only has to increase by 5x to bump earnings up 3x. Food prices have been inflating at 10-15% recently; 15% inflation over 11 years will get you there, and that doesn't include any growth in sales at all. These aren't unreasonable assumptions, given the macro environment: another 1970s inflationary episode would do it. (Indeed, Warren Buffett made a lot of his money investing in Coca-Cola and See's Candies during the 1970s.)
I am not sure about the logic (are you assuming marging expansion?) but probably you are trying to say something else than revenue has to increse "only" five-fold for earnings to triple.
> Food prices have been inflating at 10-15% recently;
Sure.
This thoughtful Quora post claims that Buffett made his first purchase of KO at a P/E of 29.
https://www.quora.com/What-was-the-P-E-Buffett-paid-for-Coca...
> Objectively, the big publicly listed companies are growing and have stellar financials.
If you don't invest for dividends then it doesn't give intrinsic value to the stock you own, it's just a proxy to the odds of your bet to dump it for a profit in the future.
Objectively, the big publicly listed companies are growing and have stellar financials. I can think of no better place for someone to invest, other than maybe diversifying into real estate with high demand, if they already have a significant amount invested in public equity markets.
Public equity market prices are also backed by the federal government, at least on a 5+ year (maybe even 3+ year) timeframe per events over the last few decades.