# Is the Stock Market a Hoax **URL:** \ **Category:** Great Debates\ **Created:** [July 1, 2005, 1:30pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677 "2005-07-01T13:30:29Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [July 1, 2005, 7:21pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/21 "2005-07-01T19:21:21Z")
> [@stupidfool](#): > > Making Money: The idea that if the company does well, your stock goes up, and you make money. Here’s the problem. If the stock doesn’t pay dividends, then there’s absolutely no reason why the stock’s price has anything to do with the money that the company does or does not make… > > People talk about analyzing a company to determine the value of its stock and whether you should buy, sell, or hold, but what you’re really analyzing isn’t the company (because again, what does it really matter how the company performs) but are instead analyzing how other people are going to respond to the company’s performance. > > Surely there’s somebody out there who gets what I"m trying to say? Somebody? Anybody? No, because what you are saying is incorrect. You seem to be under the assumption that the stocks price is based on some arbitrary market price set by the masses. That is only partially true. Roadfood is only partially correct because unlike money, stocks are tied to a specific tangible asset - the company. A company has value because it has assets that can be sold on the market for money. It generates revenue. It has a reputation (brand) that attracts (or drives away) people. All these things and more affect a stocks “valuation”. Valuaton is simply trying to figure out what a stocks price should be worth based on specific rules of accounting and finance. There are a number of ways of doing this: -The value of all the companies assets (tends to under value the stock) -The net present value of the expected future cash flows -Comparison against similar size companies in the same industry. The stocks price DOES have everything to do with how much. When someone says a company is worth 300 million dollars, what they are really saying is that the value of its assets or the expected revenue generated over the lifetime of the company (in current $$) is estimated to be 300 million dollars. It’s not an exact science, but it’s certainly not random. ---
**Author:** ![Roadfood](https://avatars.discourse-cdn.com/v4/letter/r/9fc348/32.png) [@Roadfood](https://boards.straightdope.com/u/Roadfood)\ **Post date:** [July 1, 2005, 8:40pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/22 "2005-07-01T20:40:15Z")
> [@msmith537](#): > > Roadfood is only partially correct because unlike money, stocks are tied to a specific tangible asset - the company. And in what way, exactly, does that make what I said only partially correct? I never said that a stock’s price wasn’t **based** on something with tangible value, but it’s nevertheless true that the stock itself has worth **only** because people **agree** that it has worth. Heck, the tangible assets of a company only have worth because people agree that those assets are “worth” something. Do you actually dispute that? Are you saying that there is some absolute standard of “worth” or “value” that doesn’t depend on what people agree that worth or value is? Is gold worth more than iron? Iron is a heckuva lot more useful than gold, but people pay a heckuva lot more for an ounce of gold than an ounce of iron. Why? Agreement, nothing more. Three years ago, I bought a computer. I paid $3000 for it. Today, how much is it worth? The materials used to make it – the tangible assets, if you will, of that computer – haven’t changed. Yet three years ago it was worth $3000, and today I’d be luck to get a tenth of that. Why? Because three years ago, myself (and other computer buyers) agreed that it was worth $3000, and were willing to pay that for it. But today, those same people agree that it’s worth less than $300. A truism I learned a long time ago, that applies to pretty much anything; computers, shirts, steaks, comic books, Beany Babies, eBay, and stocks: Something is worth only what someone else is willing to pay for it. > [@msmith537](#): > > A company has value because it has assets that can be sold on the market for money. But those assets, in turn, can only be sold because they have agreed upon value. The assets are “valuable” if people agree that there would be buyers for them, were they to be sold. The assets are not valuable if people agree that there would be no market for them. > [@msmith537](#): > > It generates revenue. It has a reputation (brand) that attracts (or drives away) people. All these things and more affect a stocks “valuation”. Right, exactly. And all of the things that go into that valuation have only the value that people **agree to**. Firestone had a reputation that was valuable. Until its tires started blowing up, and then the agreement as to the value of that reputation went way down. > [@msmith537](#): > > Valuaton is simply trying to figure out what a stocks price should be worth based on specific rules of accounting and finance. Rules that were made up by people, and that exist **by agreement**. > [@msmith537](#): > > There are a number of ways of doing this: > -The value of all the companies assets (tends to under value the stock) > -The net present value of the expected future cash flows > -Comparison against similar size companies in the same industry. > > The stocks price DOES have everything to do with how much. When someone says a company is worth 300 million dollars, what they are really saying is that the value of its assets or the expected revenue generated over the lifetime of the company (in current $$) is estimated to be 300 million dollars. > > It’s not an exact science, but it’s certainly not random. I certainly never said it was random, I said that the value of a stock exists only by agreement among people. I mean, please, do I have to trot out the old saw of the Internet stocks? Companies with no tangible assets whatsoever had stocks trading in the hundreds of dollars per share. Why? Not because the underlying companies were worth that much, but only because people were willing to pay hundreds of dollars per share! So that was the value, at that time. A bit later, people weren’t willing to pay anything – for the **exact** same stock in the **exact** same company – and so the value was then nothing. Nothing tangible changed, only people’s agreement as to what they were willing to pay. Same for the crash of 1929. Nothing about the companies changed, nothing about their tangible assets or expected revenue changed, except that suddenly people weren’t willing to pay the same price for the stocks as they were the previous week. The agreement changed, so the value changed. ---
**Author:** ![glee](https://avatars.discourse-cdn.com/v4/letter/g/b5a626/32.png) [@glee](https://boards.straightdope.com/u/glee)\ **Post date:** [July 1, 2005, 8:58pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/23 "2005-07-01T20:58:15Z")
> [@Roadfood](#): > > And in what way, exactly, does that make what I said only partially correct? I never said that a stock’s price wasn’t **based** on something with tangible value, but it’s nevertheless true that the stock itself has worth **only** because people **agree** that it has worth. Heck, the tangible assets of a company only have worth because people agree that those assets are “worth” something. Do you actually dispute that? Are you saying that there is some absolute standard of “worth” or “value” that doesn’t depend on what people agree that worth or value is? Is gold worth more than iron? Iron is a heckuva lot more useful than gold, but people pay a heckuva lot more for an ounce of gold than an ounce of iron. Why? Agreement, nothing more. No, that’s not completely correct. It’s true that e.g. a painting is certainly only ‘worth’ what people will pay for it. If it turns out to be a forgery of a famous artist, then its ‘value’ drops dramatically. Currency is partly in your definition. It has no intrinsic value, but as long as the Government printing it is doing well economically, the currency is sound (and may increase in value). But a poor economic performance can lead to inflation, or even hyper-inflation. But stocks are based on company assets. Land, machinery, contracts and even ‘goodwill’ + brand name recognition do count. if the company collapses, these things are still worth money. Yes, some internet stocks were hopelessly overvalued. The market potential led greedy investors to push up the price. But that’s an exception. A well run Internet business does make a profit and its shares do tend to go upwards. > [@Roadfood](#): > > Three years ago, I bought a computer. I paid $3000 for it. Today, how much is it worth? The materials used to make it – the tangible assets, if you will, of that computer – haven’t changed. Yet three years ago it was worth $3000, and today I’d be luck to get a tenth of that. Why? Because three years ago, myself (and other computer buyers) agreed that it was worth $3000, and were willing to pay that for it. But today, those same people agree that it’s worth less than $300. I don’t understand your argument at all. Your 3 year old computer has far less power, memory and more wear and tear than a modern one. The value of the metal is practically irrelevant. Of course we agree on the price - because technology moves fast in the computer field, so yours is out-of-date. Compare house prices. The technology doesn’t change anywhere near as fast as computers. A 30 year old house is pretty much as useful as a new one. So the prices don’t drop. In fact, because as Mark Twain memorably observed ‘Buy land - they’ve stopped making it’, house prices generally increase. ---
**Author:** ![Finagle](https://avatars.discourse-cdn.com/v4/letter/f/b19c9b/32.png) [@Finagle](https://boards.straightdope.com/u/Finagle)\ **Post date:** [July 1, 2005, 9:02pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/24 "2005-07-01T21:02:19Z")
> [@stupidfool](#): > > Making Money: The idea that if the company does well, your stock goes up, and you make money. Here’s the problem. If the stock doesn’t pay dividends, then there’s absolutely no reason why the stock’s price has anything to do with the money that the company does or does not make. So what if Acme Widgets made a zillion dollars in profit last year? If they don’t pay me, as a tiny part owner, any portion of the profit, then what does it matter how much they make or lose? True, the stock might go up in value, and I could sell for a profit, but that brings me back to my question. Why would it go up in value? Actually, I tend to agree with you. The stock market pretty much does act on the “greater fool” theory. It’s true that most people who make short term plays in stocks don’t believe that the dividends will amount to much. Nor do they believe that the board of directors of their company are going to say “Whee! Let’s sell everything and give the profits to our stockholders right now!” This is epitomized by day traders who really don’t add any value to the system (except by providing a steady churn of shares and probably, in the aggregate, an input of capital). Like all games (gambling and otherwise), it only works as long as everyone plays by the same rules and everyone believes that the system works. When that belief fails, you get a stock market crash. Intrinsically, betting on whether a company makes money or not and whether their stock goes up or down is no dumber than betting on a sporting event. However, as people have noted, there is a fundamental value to the stock that you’re buying, even if it’s much less than what you actually paid for it. Stockholders have been known to force dividend distributions when the amount that the company is holding becomes excessive (e.g. Microsoft’s recent flinging of largesse.) So yeah, in some sense, when you’re buying a stock, it’s like you’re betting on a horse in a race. But with the distinction that there doesn’t only have to be one winner of the race, and if your horse falls down, you own enough of it to maybe get a burger out of it. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [July 1, 2005, 9:05pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/25 "2005-07-01T21:05:59Z")
You can always sell the stock — if you value money more than stock. ---
**Author:** ![glee](https://avatars.discourse-cdn.com/v4/letter/g/b5a626/32.png) [@glee](https://boards.straightdope.com/u/glee)\ **Post date:** [July 1, 2005, 9:10pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/26 "2005-07-01T21:10:34Z")
> [@Finagle](#): > > Intrinsically, betting on whether a company makes money or not and whether their stock goes up or down is no dumber than betting on a sporting event. Can you give any facts to back that assertion up? Surely the stock market rises continually in long-term, and there is a constant loss on horse race bets (going on bookies profits). Would you invest your pension savings in the stiock market or on horse races? ---
**Author:** ![Roadfood](https://avatars.discourse-cdn.com/v4/letter/r/9fc348/32.png) [@Roadfood](https://boards.straightdope.com/u/Roadfood)\ **Post date:** [July 1, 2005, 9:27pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/27 "2005-07-01T21:27:22Z")
> [@glee](#): > > No, that’s not completely correct. > > It’s true that e.g. a painting is certainly only ‘worth’ what people will pay for it. If it turns out to be a forgery of a famous artist, then its ‘value’ drops dramatically. > > Currency is partly in your definition. It has no intrinsic value, but as long as the Government printing it is doing well economically, the currency is sound (and may increase in value). But a poor economic performance can lead to inflation, or even hyper-inflation. But all of those things pertain to the “value” of a currency **only by agreement**! > [@glee](#): > > But stocks are based on company assets. Land, machinery, contracts and even ‘goodwill’ + brand name recognition do count. if the company collapses, these things are still worth money. Only if people still **agree** that they’re worth money. Are you really trying to say that things have an intrinsic value, apart from and independent of what a person would be willing to pay for them, or that people agree is that value? I mean, let’s take gold. It’s about as tangible as you can get. It is, in and of itself, valuable, right? I think that even the OP would agree that it fits his definition of something that someone would want to own. But does gold really, really have an intrinsic value, or does it just have the value that a bunch of people agree to? I see that today, on the NY Spot Gold market, it opened at $435 and closed at $427.10. Gosh, the gold didn’t change (unlike my computer analogy, you can’t say that it got “less powerful” or less desirable or something); an ounce is still an ounce. What changed? The agreement among those who set the prices as to what the value of gold ought to be, that’s all that changed. It’s all just agreement. > [@glee](#): > > Yes, some internet stocks were hopelessly overvalued. The market potential led greedy investors to push up the price. But that’s an exception. A well run Internet business does make a profit and its shares do tend to go upwards. Again, you are just describing how the stock market works, with which I have no dispute. My point, which I guess I’ll just keep making, is that it only works that way because **that’s what people have agreed to.** I could set up a “market” that traded in “stocks” in companies where the valuation of those “stocks” was based on how many one-armed pushups the company directors could make. Silly, true, but if I got a bunch of people to agree to that, we’d have a market. Prices would go up if a company director was seen (or rumored to have been) in a gym. They’d go down if he was seen at a MacDonald’s. That’s a silly – but perfectly reasonable – way to arrive at a “value”. The only difference between that and the actual stock market is that the agreement as to what constitutes “value” is different. > [@glee](#): > > I don’t understand your argument at all. Your 3 year old computer has far less power, memory and more wear and tear than a modern one. The value of the metal is practically irrelevant. > Of course we agree on the price - because technology moves fast in the computer field, so yours is out-of-date. So then you’re agreeing with me: The intrinsic value of the “assets” of the computer – the metal it’s made of – is far, far less important than the intangible agreement that people make as to how to arrive at the value of the computer. > [@glee](#): > > Compare house prices. The technology doesn’t change anywhere near as fast as computers. A 30 year old house is pretty much as useful as a new one. So the prices don’t drop. In fact, because as Mark Twain memorably observed ‘Buy land - they’ve stopped making it’, house prices generally increase. Right, all you’re saying is that the agreement as to how to arrive at the value of a house is different than the agreement as to how to arrive at the value of a computer. It’s still, though, just agreement. A house in San Francisco is “worth” a million dollars. Put that same house in rural Arkansas and it’s worth half that (or less). The house didn’t change, what changed? The agreement as to how to value a house; location is part of that agreement. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [July 1, 2005, 10:05pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/28 "2005-07-01T22:05:40Z")
> [@Roadfood](#): > > And in what way, exactly, does that make what I said only partially correct? I never said that a stock’s price wasn’t **based** on something with tangible value, but it’s nevertheless true that the stock itself has worth **only** because people **agree** that it has worth. That’s not an explanation. Why do they agree that stocks have value? It’s because they are tied to companies that produce things that people want and need. ---
**Author:** ![Roadfood](https://avatars.discourse-cdn.com/v4/letter/r/9fc348/32.png) [@Roadfood](https://boards.straightdope.com/u/Roadfood)\ **Post date:** [July 1, 2005, 11:25pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/29 "2005-07-01T23:25:55Z")
> [@msmith537](#): > > That’s not an explanation. Why do they agree that stocks have value? It’s because they are tied to companies that produce things that people want and need. But that’s only true because people **agree** that the stock is tied to the value of the company. And the “value” of the company is, itself, only something that has meaning because people agree as to what constitutes that value. As I said, it would be perfectly valid to tie a stock’s “value” to how many pushups the company directors can do. If people agreed to it, that would be a perfectly valid way to measure the “worth” of a stock. But people don’t use pushups, they agree to a different method of valuating a company, and hence the stock. That doesn’t make it any more “real” or “tangible”, it’s just what the agreement is. Remember what the OP asked: > [@stupidfool](#): > > With stocks, no one wants to own them. I buy it to sell it to someone who only wants to sell it to someone who only wants to sell it, and so on and so on. Ultimately, nobody wants it, and if nobody wants it, how can it have any value at all? I’ve been answering that specific question: It has value because people agree that it has value. You and other posters are doing a good job of explaining **why** they make that agreement, and I’ve been pointing out that it’s just an agreement. The OP is totally correct that a stock has no value, in and of itself. A share of a stock has no purpose to which it can be put, other than to sell it to someone else. Contrast to a shirt, as in the OP, which has a purpose, in and of itself, and from that purpose some sort of value can be derived. A share of stock can be used for nothing other than being sold. ---
**Author:** ![Finagle](https://avatars.discourse-cdn.com/v4/letter/f/b19c9b/32.png) [@Finagle](https://boards.straightdope.com/u/Finagle)\ **Post date:** [July 1, 2005, 11:31pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/30 "2005-07-01T23:31:41Z")
> [@glee](#): > > Can you give any facts to back that assertion up? > Surely the stock market rises continually in long-term, and there is a constant loss on horse race bets (going on bookies profits). > Would you invest your pension savings in the stiock market or on horse races? Eh? I said “it’s no dumber than betting on a sporting event”. That doesn’t at all imply that it isn’t \* smarter \* than betting on a sporting event. So I’m not sure there’s any assertion there that needs backing up. ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [July 4, 2005, 3:04pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/31 "2005-07-04T15:04:52Z")
> [@msmith537](#): > > Why do they agree that stocks have value? It’s because they are tied to companies that produce things that people want and need. I must be stupid - I still don’t understand it. Assume a company never, ever pays dividends. Never, ever - this is important to my failure to understand. I own a share of stock in that company. I paid, say, $10 for the share. AFAICT, I realize no benefit from my $10 - I don’t get any dividends. Is there some other revenue I get? Or the revenues of the company double, and the share price is now $20. How am I better off if I receive no revenue? Or why would anyone else want to not get any revenue from a stock worth $20 more than not getting any revenue from a stock worth $10? Why is there more demand for not realizing any income by spending more money? Regards, Shodan ---
**Author:** ![C\_K\_Dexter\_Haven](https://avatars.discourse-cdn.com/v4/letter/c/b2d939/32.png) [@C\_K\_Dexter\_Haven](https://boards.straightdope.com/u/C_K_Dexter_Haven)\ **Post date:** [July 4, 2005, 3:52pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/32 "2005-07-04T15:52:07Z")
Just a footnote: while the overall stock price depends on the value of the company, it also depends on the perceived future value, not just on the current assets/liabilities. And, of course, perceptions of the future are subjective. Plus, the number of shares of any given company is limited, so if a lot of people start selling shares (or even if others perceive that people will start selling shares), the price may go down because of supply/demand. So, while there is a “value” behind the stock, the day to day fluctuations can vary based on random factors. Remember that, at bottom, the stock represents ownership in a company. You would want a shirt to wear and a steak to eat, but you might want to own a company to make money. There are a number of things, not just stocks, that people buy as an investment – property, for example, or art work, or jewelry. Or you might loan money to a friend who wants to start up a business, and promises to pay back the loan with interest as the business is successful. However, if the business is unsuccessful, the loan may not be repaid. And you take that gamble with your friend. That’s what stock is, at bottom – it’s a loan you make to a company, which they will invest and which you hope they will repay to you with interest/profit/dividends. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [July 4, 2005, 5:17pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/33 "2005-07-04T17:17:33Z")
> [@C K Dexter Haven](#): > > There are a number of things, not just stocks, that people buy as an investment – property, for example, or art work, or jewelry. Or you might loan money to a friend who wants to start up a business, and promises to pay back the loan with interest as the business is successful. However, if the business is unsuccessful, the loan may not be repaid. And you take that gamble with your friend. That’s what stock is, at bottom – it’s a loan you make to a company, which they will invest and which you hope they will repay to you with interest/profit/dividends. Careful, Dex: your last sentence is highly misleading. A bond is a loan to a company. A stock represents part ownership in the company. ---
**Author:** ![JRDelirious](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/jrdelirious/32/9531_2.png) [@JRDelirious](https://boards.straightdope.com/u/JRDelirious)\ **Post date:** [July 4, 2005, 5:28pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/34 "2005-07-04T17:28:37Z")
> [@Shodan](#): > > Or the revenues of the company double, and the share price is now $20. How am I better off if I receive no revenue? You sell the stock and get a 100% ROI. Of course, then you no longer own the stock. But you ARE better off relative to day one. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [July 4, 2005, 5:29pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/35 "2005-07-04T17:29:45Z")
> [@Shodan](#): > > I must be stupid - I still don’t understand it. > > Assume a company never, ever pays dividends. Never, ever - this is important to my failure to understand. > > I own a share of stock in that company. I paid, say, $10 for the share. AFAICT, I realize no benefit from my $10 - I don’t get any dividends. Is there some other revenue I get? Many companies don’t pay dividends. It’s an investment. That is to say, you are buying shares in a company with the hope that it will grow and prosper and increase in value. So what happens when the revenue doubles? Well presumably the stock price would increase as well as more people see that the company is growing and want to get in on the action. > [@Measure for Measure](#): > > A bond is a loan to a company. > > A stock represents part ownership in the company. This is an important distinction. With a bond, you are buying debt. Instead of paying money to a bank, they are paying money (plus interest) to you. Bonds are less risky because regardless of how the company does, they still owe you money. With a stock, you have purchased part of the company. It’s yours (or 1 millionth of it is) so if it goes under you are SOL. ---
**Author:** ![David\_God\_of\_Frogs](https://avatars.discourse-cdn.com/v4/letter/d/5f9b8f/32.png) [@David\_God\_of\_Frogs](https://boards.straightdope.com/u/David_God_of_Frogs)\ **Post date:** [July 4, 2005, 5:32pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/36 "2005-07-04T17:32:59Z")
> [@](#): > > Originally posted by **msmith537** > _Why do they agree that stocks have value?_ First of all, while that question is important for understanding the markets and such, answering it isn’t strictly relevant to prove **Roadfood** ’s (and **stupidfool** ’s) point that stocks don’t have intrinsic value. Second of all, FWIW, your explanation that people value stocks becuase they help companies “produce things that people want and need” - implying that people invest out of charity - doesn’t hold up. People make the agreement because, with the markets as they currently are, they can make money off of this agreement. That’s not an intrinsic function of the market though, and it doesn’t need to be the case all of the time, even if it is true most of the time. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [July 4, 2005, 5:39pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/37 "2005-07-04T17:39:28Z")
**Shodan** hits the nub of the issue with greater precision. Why would somebody buy a stock that doesn’t pay dividends? 1. Perhaps the stock is in a company with terrific prospects. If this is the case, it may make sense for the company to _postpone_ paying dividends and deploy the funds for internal growth. 2. Ok, but what about Berkshire Hathaway? They have had no plans for paying dividends for the past 30+ years. Where is the value? a. The short answer is that buyers of stocks also purchase with an eye towards capital gains. b. Indeed, since capital gains are taxed lighter than dividends, BW’s policy is reasonable. c. A stock that pays no dividends still has breakup value. More importantly, it may be purchased by another company. Since our hypothetical buyer would gain full control of the takeover target, it would be free to pay up to the target’s, “underlying value”. Said underlying value would be related to the targets ability to generate _profits_ as opposed to its propensity to pay dividends. d. So a stock market investor might be interested in a company’s ability to produce earnings (as opposed to pay dividends), because she knows that’s what the takeover artists will look at. More to the point, she _also_ knows that other stock market investors value the company in this manner. 1. Does this seem like a hall of mirrors to you? It sure does to me. But let’s ignore that. 2. In the 1950s (1940s?), conventional wisdom was that stocks valuation should be based upon forecasts of future dividend payments. At some point that became _passe_. My memory is a little fuzzy here: greater precision would require some digging. ---
**Author:** ![PastAllReason](https://avatars.discourse-cdn.com/v4/letter/p/f07891/32.png) [@PastAllReason](https://boards.straightdope.com/u/PastAllReason)\ **Post date:** [July 5, 2005, 3:15am UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/38 "2005-07-05T03:15:38Z")
To add a little more to this, and putting it another way, there are two kinds of revenue that a person may be looking for when purchasing stock: 1. dividends or a dividend stream paid while the purchaser owns the stock; and 2. capital gains realized on selling the stock. The kind of revenue that you’re looking for should assist in stock selection. Some companies have moved out of a growth phase, into a stable “cash cow” state. Such companies will routinely pay dividends to their investors, who “rely” or have expectations that the dividends will be reguarly paid. This kind of investment may be attractive to those looking for a relatively safe place to invest their money (the purchase price of the stock) while at the same time realizing dividends (interest if you will, at a rate higher than they could achieve from other kinds of investments). At the extreme end of this, if all their “profit” is paid out in the form of dividends, one shouldn’t expect significant increases in the price of a company’s stock. At the other end of the spectrum are companies that are in an aggressive growth phase, or who are habitually in a growth phase. These companies will not pay any dividends. They will be retaining their “profit” in order to reinvest in the company. These companies are attractive investments for people who are not looking for an immediate revenue stream, but instead are gambling that the company will in the future be worth significantly more than it is currently and when they eventually sell their stock, that they will make a lot of money on the sale of the stock. This was the kind of investment that appealed to many in the [dot.com](http://dot.com) craze, which obviously didn’t go well. However, as \*\*Measure for Measure \*\* noted, this is also the kind of investment that Berkshire Hathaway is, and nobody could say that Warren Buffett doesn’t know what he is doing. Companies will fall somewhere along the spectrum, balancing how much of their profit they pay out in dividends to their investors, and how much they will retain for future growth leading to an acclerated growth in the stock value that the owners may reap in capital gains if they choose to sell the stock. Also as noted by **Measure for Measure** , there are different taxation rates that apply to dividend income and to capital gains. The rules also vary between countries. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [July 5, 2005, 2:47pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/39 "2005-07-05T14:47:04Z")
> [@David](#): > > First of all, while that question is important for understanding the markets and such, answering it isn’t strictly relevant to prove Roadfood’s (and stupidfool’s) point that stocks don’t have intrinsic value. Their point is incorrect. While stocks are just pieces of paper, they do represent ownership in a company. They have just as much intrinsic value as a deed to a house or any other contract. Yes if civilization collapses they aren’t worth anything but I think at that point you have more important concerns. > [@David](#): > > Second of all, FWIW, your explanation that people value stocks becuase they help companies “produce things that people want and need” - implying that people invest out of charity - doesn’t hold up. People make the agreement because, with the markets as they currently are, they can make money off of this agreement. That’s not an intrinsic function of the market though, and it doesn’t need to be the case all of the time, even if it is true most of the time. Who said anything about charity? A company that produces things people want and need generally is successful. A successful company makes money. The more money a company makes, the more it’s worth and the higher the stock price goes. I think it only becomes a house of mirrors when people fail to pay attention to the actual companies behind the stock and just trade on the percieved value of the stock itself. ---
**Author:** ![Scott\_Plaid](https://avatars.discourse-cdn.com/v4/letter/s/258eb7/32.png) [@Scott\_Plaid](https://boards.straightdope.com/u/Scott_Plaid)\ **Post date:** [July 5, 2005, 3:22pm UTC](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677/40 "2005-07-05T15:22:22Z")
**stupidfool** , have you ever bought any stocks? [Previous page](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677.md?page=1) [Next page](https://boards.straightdope.com/t/is-the-stock-market-a-hoax/310677.md?page=3)