You’re both right. The equity risk premium [1] is real. But it’s a premium over something. That something is, approximately, production. (It’s precisely the risk-free rate of return. Which, in the long run, is base-rate production.)

[1] https://www.investopedia.com/terms/e/equityriskpremium.asp

Having said that, if you wanted a return strictly on base-rate production, then you'd invest then in risk free assets (vs equities).

Based on your name I bet you work in research at a hedge fund.

I hate to break it to you but ask most people who are price setters what their discount is and they’ll say 10% regardless of 10Y treasury yields (since you know, TINA)

As a result securities are increasingly priced on liquidity more than cash flows and that’s a function of the credit cycle way more than it’s a function of productivity.

It’s a weird post modern approach to the economy, but hey that’s showbiz baby.

A large amount of corporate profit growth since the 80s has been due to a declining share of labor compensation vs capital and declining effective tax rates. Productivity gains are the only real “free lunch” which is what capital investment is supposed to provide to justify the gains. Productivity growth has been stagnating for a couple of decades.

It feels very weird that the same:

1. US government (which bailed out some big banks when they did all of that corrupt greedy stuffy during the '07 housing collapse) 2. the predatory banks themselves 3. institutions like Vanguard, Blackrock, UBS

really let "the small guy" win in the "retail investor" by allowing us to just click "buy" on things like index funds. it all seems too good to be true. when does the little guy ever actually win?

I have a dumb question. Most publicly traded companies rarely issue new shares. Why does a company care about its share price? If we are being rewarded for buying and holding their shares based on the growth a company makes quarterly, how does the company benefit from their share price going up? They don't commonly take loans against their shares or issue new shares. I know they have a duty to shareholders but... take Facebook for example. Who cares if their stock is down 60%? How does it affect the companies financials?

You don't actually need a separate "fiduciary duty". It comes from the shareholders themselves. If the shareholders are happy with a company has motivations other than maximizing profit, they can.

There's even a legal category for that: Public Benefit Corporation. Some of them are publicly traded -- like Warby Parker. Public Benefit Corporations are somewhat protected from shareholders forcing them to pursue profits, which will hurt the stock price, but investors can value the stock based on the benefit they perceive the company to be doing. (Like Warby Parker giving away free glasses to poor people.)

For regular companies, the executives try to make the line go up because if they don't, they'll lose their jobs.

False, most public companies have stock based compensation plans, which are ways of issuing new shares. Without them, they would need to substitute stock compensation with cash to acquire talent.

Facebook issues shares every time they approve a new stock based compensation plan.

FB has 2.3b shares outstanding. How much has that number grown past 12 months, 24 months, 36 months so I can put what you are discussing into perspective?

In terms of new issuance, FB spends billions in stock based compensation each year since 2012, all of these are new issuance under the equity incentive plan. It was ~$9.164B for FY2021 alone.

In terms of buybacks, FB started buying back stocks in 2017 and has continued since. In FY2021, they spent ~$55.47B to buy back stocks.

Therefore, outstanding shares have been decreasing since around 2020. But this doesn't mean the company stops issuing shares. The more stock prices fall, the more equity they would need to issue to compete for talent, or alternatively supplement with cash. Long term, stock prices is one of many measures of how the company would be able to raise capital (stock based compensation is an indirect way of raising capital).

Data from Bloomberg: https://postimg.cc/Lq0sNCJV

If a company doesn't care about share price, the shareholders will elect a board of directors who will install a management team that does care about share price.

Executives who don't worry about share price get to work somewhere else.

Since the executives and the board decide what a company does, it's absurd to ignore them.

I get that you have a model of companies that isn't consistent with how companies behave. That mismatch tells you that your model is wrong.

It isn't reality's job to explain itself in terms that you choose.

Your model doesn't account for all relevant facts, such as the interests of stock-holders.

Shares of stock represent ownership in a company. If the company performs well and earns increasing amounts of money over time, that means the company is more valuable.

If the number of shares remain static, increasing earnings means the value of the company is higher on a per share basis and justifies a higher price per share. The company performance drives the stock price.

If I own stock in a company whose executives do not work to keep the stock price up or even increasing, I will replace those executives with executives who will work to keep the stock price up/increasing. (Corollary - I will not buy stock in a company whose executives are unconcerned with stock price. That unwillingness means that folks who own stock and might want to sell it to folks like me will "encourage" executives to make that possible.)

Is it really hard to understand that stockholders care about stock prices and that they will "encourage" the company to maintain/increase the value of their investment?

Would you buy stock in a company that didn't try to maintain/increase the stock price? Why?

This has nothing to do with bank financing or further stock sales by the company, although those can also be factors.

People don't want to risk investing without expected gain. But the risk is not causing growth.