I hope you weren’t one of the people who planned to finance their retirement on Beanie Babies. Because in your view they were perfectly rational.
You should watch Antiques Roadshow. The appraisers often talk about how the value of an item changes dramatically based on the economy or popularity, and of course scarcity. There is only one Piss Christ, but lots of pebbles.
Posters in this thread take different perspectives (somewhat akin to the blind men touching an elephant). I thought my perspective might shed helpful light, but evidently not. (BTW, the link in OP only seems to work for subscribers.)
Can you restate your thesis simply and objectively? Meanwhile I’ll try to clarify my earlier answer:
Suppose a friend invents a widget machine you think will be profitable, but needs money. You give him money in return for shares in his new company. Would that stock purchase have the same objection you raise?
If you answer “No,” reread my earlier post, paying particular attention to “Stated differently, even if the shares you buy are not part of an IPO, the funds you invest will eventually reach an IPO via a chain of buys and sells.”
Perhaps I just run in sophisticated circles (though it doesn’t appear so to me), because I wouldn’t characterize such misunderstanding as being common.
There can, indeed, be more or less money flowing in or out of stocks at any time, as the demand for stocks waxes and wanes. The result is a general increase or decline in the price of stocks, and thus a general increase or decline in the total market value of all stocks held.
There are persuasive arguments either way on that one.
My objection was to your lumping in stocks with pebbles and the tulip mania. Unlike those things, stocks have an inherent value: they are a piece of ownership of a going concern, and thus don’t depend upon fashion or manias to be worth anything at all. Of course, market prices can be too high or too low, and market corrections in either direction will create or destroy wealth from thin air.
A pension fund that holds Stock A might decide that it expects Stock A to remain flat in value over the newxt couple of years, while it expects Stock B, which the fund does not currently own, to rise somewhat in value. In theory, it should sell Stock A and buy Stock B, but if the tax it would pay on selling Stock A overwhelms the expected gain from Stock B, the fund may decide to stick with Stock A despite its lower performance.
An individual investor who might have sold some stock to finance a home renovation might borrow from a home equity line instead. Or she might put the project off for a few years if she expects some other stock she owns to head downward, so that she would have a loss to balance the gain, or if she thinks the next Congress might be trending toward tax reduction.
You sound like a communist. You and Warren Buffet. Next you’ll be claiming the real value of a thing has something to do with the amount of labor that went into creating it.
Wasn’t it Karl Marx who said: “Labour, therefore, is the real measure of the exchangeable value of all commodities… Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased…”?
How on earth did you get communism or Marxism from discounting the the future income of an asset to its present value? It’s a method of calculating how much an income-producing asset is worth at the present moment, not throwing price and income out the window and replacing it with objectively-wrong labor-theory-of-value garbage.
Well, no, we’ll still be their problem: we’re going to be old and sick and feeble. If we own a bunch of worthless stocks, somebody’s still got to take care of us. Thank god for Social Security, is all I’ve got to say.
True, except I’d leave out the “your” part of it. It’s just logic. It’s not mine in particular.
And I do have money in my house. It’s in my sock drawer.
IPOs fund companies, which make up .00001% of the market. The rest is just people trying to make money off each other.
So the fact that a car costs $25,000 has nothing to do with the value of the car but rather the whims of the market? Or the fact that the “value” of owning 10% of a company that makes cars has nothing to do with how good the car is that they make, how many cars they are able to make, how many cars they are able to sell, etc. but rather the piece of paper saying that I own 10% of that car company’s value is inherently unstable and there’s no way to tell if I’m owning 10% of crap or 10% of something useful?
The point was that stocks are income producing assets, aka investments, which have the potential to generate greater income in the future. Non-income producing assets such as gold, or a pebble, don’t have that quality and therefore aren’t comparable.
Yes, but as has been said already, IPOs would not exist if it wouldn’t be for the rest of the market. One reason people feel willing to buy an initial share of a public offereing is because they know they can sell it if they want to, and the reason they can sell it is because there is a public stock market.
It’s not people trying to make money off each other although to the simple minded that’s probably how it appears. If I sell something to you it isn’t necessarily because I think you’re a sucker. Maybe I got a margin call from my broker. Maybe I need the cash for a more promising investment. Maybe I want the money to put into futures or commodities or whatever.
This all gets back to the issue of liquidity and you’re right to highlight this function of markets. Without them, people would in fact be much less willing to invest.
Yeah, that’s the problem with the market - it has nothing to do with intrinsic value. It’s purely a question of what someone else will pay. During the bank crisis, banks argued their CDOs were “really” worth what they’d paid for them, even though the market said they were worth $0. (No one no one would buy them.) Who was right?
In any case, the point is that the value of a fake Picasso is what someone will pay for it. Of no one figures it out (or cares) maybe the value IS $1 million.
Who was Picasso, anyway? Just some guy who painted portraits. Maybe the fake Picasso is a better painter than the real one.
I said real wealth. Dollars, like stocks, are financial wealth.
Dollars get created when people borrow, and get destroyed when debts are paid. In that sense, the net value of dollars is always 0, since every dollar asset is always exactly balanced by a dollar liability somewhere else.
The fractional reserve story of money creation is a complicated, unnecessary fairy tale. Banks create money by lending. If they need more reserves, they borrow it from other banks, or from the Fed itself. It’s not any more complicated than that.
All those things are just examples of market forces at work. Sometime the market pushes prices up, sometimes down. Sometimes it can move very quickly. But you’re right, the surplus of pebbles is a problem for people in the pebble market. If there was just one pebble, it’d be better for the guy with the million dollar pebble. If they couldn’t make diamonds, that were better than the ones they did out of the ground, it’d be better for diamond retailers.
During the Depression, they slaughtered pigs, to keep the price of pigs from falling. Book retailers destroy old books, rather than sell them cheaply, to keep them from competing with newer, more expensive ones.
Wow. I don’t even know where to begin. I think I’ll need some vinaigrette for that word salad. Or maybe not since it’s pretty clear no one here except for maybe **Septimus **takes you seriously anyway.
So, dollars aren’t real wealth eh? I’m just dying to know what is then. Maybe real estate? I mean it’s got the word “real” right there in the name so it must be . . . well, ‘real’ - right? Oh, but wait, we buy and sell it using dollars so how can that be right. Damn Linus. I’m just stumped. Help me out bro.
And please don’t come back and start talking to me about inflation since that’s always taken into account by economists when making comparisons. The fact that individuals tend not to is hardly an indictment for using currency as a proxy for wealth.
LOL. I can’t even imagine how you came up with that. Money is created and destroyed via fractional reserve lending of course (and not just banks, but also the vast shadow bank system). But the idea of the ‘net’ value of dollars being zero shows you have no understanding whatsoever of the whole purpose of monetary policy, which is primarily to adjust the money supply to economic activity.
So what does that mean do you think? What happens with more activity? More goods and services are produced - right? Those have value - right? Ergo, the net value of the dollars in the economy, if held constant can’t possibly be zero. The whole objective of money policy however though is to do what? Let’s see if you can tell me at least that much.
As an aside though, money is also created by central banks. Well, fiat money anyway. In the case of the US, that would be the Federal Reserve. It creates money when it purchases securities through the Federal Open Market Committee and drains liquidity, i.e., destroys money, when it sells securities. It can also do some fancy footwork with things like repo’s and reverse repo’s.
Let’s first see how you do with the question I asked you in part 2, but let me also ask you this. Why do you think people borrow money? Where does that money go and what’s done with it? Do you think it just goes into bidding up the price of pebbles?
Actually I’m a guy who has read financial textbooks, most of them mathematical. So has Buffet and Munger. That’s where my argument originated. For a feel of it, skim this.
Keynes made a decent description of the stock market that is consistent with both sorts of stories (pebbles and PDV(present discounted value)). Keynesian beauty contest - Wikipedia
[QUOTE=wikipedia]
Keynes believed that similar behavior was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.
[/QUOTE]