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> [...] these days, so as time passes, removing their stock price from the price at IPO, their stock price becomes based on perception--not even perception of the reality [...]

John Maynard Keynes developed this idea (that came to be known as Keynesian beauty contest[1]) in 1936. This isn't a new property of the market, it has always been the case.

> when companies do pay dividends or buy back stock, it's sometimes done by borrowing money

It's not clear that this is a problem, given that cash is basically free (though they do have to pay back the principal). I'd be interested to see what proportion of dividends and buybacks comes from borrowed cash. I suppose calculating such a thing would be very difficult, but it'd be interesting to see some analysis on this.

> if 90% of people pull out of the stock market, it's quite possible for the stock market to go up

What if 90% significantly cut consumption? Ultimately the companies have to sell their products to somebody.

[1] https://en.wikipedia.org/wiki/Keynesian_beauty_contest

They have to sell something only if the Fed don't give them money (and dilute the share of the lower 90% as a side effect).

> What if 90% significantly cut consumption? Ultimately the companies have to sell their products to somebody.

Well, that's almost the interesting question.

A certain percentage of what the 90% consume, they can't stop consuming. You have to eat. You have to wear clothes. You have to live somewhere. You have to go to the doctor. So there's a whole big chunk that the 90% really can't stop consuming.

And if you want to be in the upper parts of that 90%, you need a computer, a car, a cell phone, college... So there's a bunch more of that where the 90% could stop consuming, but it would be a pretty significant sacrifice.

And for the remainder, there's an entire marketing industry manipulating us to make sure we don't stop consuming. Even as someone who actively tries be aware of marketing and remove marketing from my life I catch myself sometimes falling for it, and buying things I don't want or need. And I'm sure there are times it happens when I don't notice it. A significant part of Hacker News thinks advertisers are just out to help us find products we need!

The proles will never revolt, Winston.

The interesting question isn't really whether people will voluntarily cut consumption. It's more, "What will happen if the bottom 90% loses the income necessary to consume?"

Cynically, I think that won't happen, and the top 10% will just make enough concessions to keep the 90% alive and not revolting. We already see that in things like Amazon's $15 minimum wage: it's not a meaningful wage when Bezos is making $9 million/hour, but they can always make arguments like, "We're paying more than our competitors" and "We're preventing homelessness".

And that's not necessarily a bad thing: I want to see change, but I'd rather see it happen slowly through education and care than quickly with blood running in the streets.

“Because the stock market doesn't represent the economy as most people experience the economy.“

That’s my theory. The top 10% own most of the stock but their experience of this crisis is quite different from people who already had low wages now losing their jobs. I bet most of the people (not all) on this site don’t feel the crisis economically at all or only with minor pain.

Personally I think we should stop looking at GDP, stock markets or housing prices but instead the economy should be optimized towards raising things like median wages or purchasing power. In the end that’s what really counts.

In the end what really counts is the health of members of society as a whole.

Providing everyone with basic life necessities would be a good start.

I agree that metrics should be tied to actual individual income and not the stock market or GDP. (As an aside, my cynical belief is that we've always known those to be poor metrics but we use them anyway because they measure what people with power actually care about). But keep in mind that even median income is not a good indicator of economic standing with high cost of living. Whatever it is would ideally capture how much spending/saving power is left over after essentials (warmth, shelter, food, water, health etc).

That’s why I mentioned something like purchasing power.

> The stock price might remain tied to the performance of the company in broad strokes, but without regular dividends, sales, or buybacks to tie the stock back to the company, there's nothing to keep it from becoming disproportionate with regards to the company's value.[1]

Total stock market noob here, so apologies if this is a dumb question - but I've wondered this for quite some time: There seem to be some extremely well-performing stocks (e.g. Apple, I believe) that don't pay dividends, don't give you voting rights and are not expected to be bought back anytime soon.

How are those stocks connected to the company at all? As an owner, what do you do with those stocks, except selling them to someone else so he can sell them to someone else in turn?

How do they get their value?

Apple one day might start paying dividends. As the company matures, and growth slows, returning value to shareholders (if no better options exist) is a wise use of capital. Value can be returned via dividends, but also through share buybacks.

Apple returned 81 billion dollars to shareholders last year: "During its latest fiscal year that ended in September, Apple bought back $67 billion in stock and paid out $14 billion in dividends" [0].

[0]: https://www.barrons.com/articles/apple-stock-buyback-dividen...

> a lot of companies don't pay out dividends or buy back stock these days, so as time passes, removing their stock price from the price at IPO, their stock price becomes based on perception

ignorant question, if true, how is this not the worlds biggest ponzi scheme? Are we just betting on the possibility of dividends in the future? It just seems illogical. The fraction of meaningless ownership as a shareholder can't be worth that much to most people.

Then to take this to the extreme why do we bother with stocks, why don't humans just collectively put money into a a giant pot where we can withdraw proportionally at any time. Isn't that what we are doing with stocks?

It is and it will get corrected. The question is how. The CPI could inflate to match the asset bubble, or the bubble could pop. The first is looking more and more plausible. When either happens, it will be ugly, but if the first scenario plays out, "cash is trash" as Ray Dalio says.

I am right with you, I've never understood what the actual purpose to owning shares is other than "their price goes up when the company is expected to do well" -- but what do you get for that price being higher?

Without dividends the whole idea of stocks makes no sense to me.

With dividends, I would think "I'll buy this stock for $100 with the expectation that I'll get a $10 dividend next year, a $12 dividend the year after that, etc etc, and eventually make my money back!"

In the case you buy a bunch of stocks and just hold onto them, they generate value by the company doing well. I could buy shares of a bunch of companies and wait 30 years, and if most of those companies are still doing well, I'll have made a profit from dividends, and I can then sell those to some wide-eyed young person who is hoping the company will continue to do well so they can get their payments for the next 30+ years. If the company instead does well for 20 years and then abruptly goes out of business, I still would've gotten lots of payouts from them, but now I can't sell those shares to someone who hopes for future payouts anymore.

But if there are no dividends, none of this makes any sense -- I'm buying the shares, making no money for the 30 years that I sit on them, then selling them to some wide-eyed younger person for a higher price who expects to also make no money for 30 years, but to be able to sell the shares to some new younger person? There's no endgame with a payout here, but there is an end where the company goes out of business. So what value was the share providing the owner over those 30 years??

You are not forced to hold onto non-dividend paying stocks, you can sell them gradually to create "dividends" for yourself. As a first order approximation, buying a $100 stock that gives you a $5 dividend but stays at $100 is not different from buying a stock that doesn't distribute a dividend but appreciates 5% every year.

Thanks for the response! I guess my issue is that there's no actual value in owning non-dividend shares for any amount of time. So I can sell the stock to someone else, but what are they paying me for? The opportunity for the value to increase more? Why is someone interested in paying me more than I paid? I feel like there's never any real money that's made back by owning those shares. What's the goal?

Removed from the stock market, if I privately invest in a company for $1m for 10% of the company, it's because I'm hoping that someone else will see that the company has value and purchase it, giving me 10% of that future purchase price. The company sells a product of some sort, and I have a 10% vote in what they do with that money, which I'm hoping is to sell to a larger company.

Is the goal the same on all of these non-dividend paying companies -- to be bought by a bigger company? Because otherwise there's no value in the shares except speculation itself, which seems pointless to me

Even non-dividend-distributing companies can give real cash to shareholders in exchange for those paper share certificates by buying back shares. But it's true that for some companies it's quite difficult to justify valuations.

Stock gives you a legal claim to a portion of the assets of a company, which as you point out, manifests itself quite clearly during a liquidation event like a dividend payment or an acquisition by some other entity. But tt shouldn't bother you that plans for such a liquidation event might not be clear when you buy the stock. What matters to you (and future investors that might buy your shares from you) is that if such an event happens, you have to be compensated as a result. That's why your shares retain value.

To take a more specific example, Google has ~$100B of cash on hand, and it does not pay any dividends. Let's just assume that Google is nothing more than a box containing $100B, and you own a portion of that box amounting to $1000. Even though you can't reach your hand in and take out that $1000, it's yours. In the event it gets released from the box, you're the only one that can get at it because of your ownership. And because everyone else realizes that, there's a pretty clear value to that ownership that they would rationally pay you for.

Of course, Google is much more than just a box of money, it is a box of many things, some very intangible (but still valuable). This extra value makes it worth far more than $100B. But it's still a box, and if the value gets released from the box, you're the one who gets it. So who wouldn't pay (at the correct price) for that?

This was a really helpful explanation, thank you! I have really minimal experience in finance and economics (other than keeping savings and blindly dumping money into index funds). I really appreciate you for taking the time to respond!

So really when you get down do it, you're paying for the prospect that the company will eventually be able to do something that will return money/value to you, but you don't know what. And so when you're buying shares, you're analyzing the risk between them going broke, and the value that they could potentially pay out someday. Same as private equity, but with a less clear path to actually extracting value from the company.

Then if the company was really screwed up, the shareholders could technically vote on a way to turn the company's assets into cash, which they would get a portion of. Or do anything else with, since the shareholders get to vote on the outcomes of those things.

There's a couple points you're missing. Even if there's no dividends, as long as the shares represent legal control, they can be purchased by other companies or individual to gain control of the profits, direction, or assets of the company. This gives the shares value independent of dividends.

The problem with this idea is that increasingly company founders are opting for dual(or even triple) share structures by issuing massive amounts of non-voting stock to outsiders.

It is all a game of musical chairs when you buy GOOG(not GOOGL), FB (class A) Facebook shares which have 1/10 voting power of Zucker class B shares.

The list of these abominations goes on and people keep buying and trading them. If you are a company founder and can get away with this (Zynga had some trouble but still got away with it) you'd be selfishly stupid not to do it.

And don't get me started on Chinese stocks where you are buying ADR of some entity in Bahamas which has no say at all over the Chinese parent.

EDIT: Why is it wrong for a company founder to have full voting control? It is wrong when he/she has less than 50% ownership that's what's wrong. If you have 20% of the company but have the super-voting shares you can decide to take the company into a bad direction and the 80% have no say.

I have no disagreement with anything you've said, actually. It is kind of an interesting swindle, really.

> First, a lot of companies don't pay out dividends or buy back stock these days, so as time passes, removing their stock price from the price at IPO, their stock price becomes based on perception--not even perception of the reality of the company's value, but perception of the stock's value, which is increasingly just speculation.

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.

> 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.

It is really not a mystery why the market has done so well and will continue to do well. Corporate profits, especially in the tech sector, are at near record highs, much higher than during the 90s. Companies like Walmart are printing cash, and that money goes into buybacks, dividends ,or shareholder equity. Either way, shareholders benefit and this is magnified by very low inflation, so the real return is even higher than it was compared to the 80s and 90s. If huge, multinational companies generate 20-30% profits or cash flow, that is $ that will go to shareholders one way or another. Great time to be in the stock market. Added to positions in April at a discount.

Corporate earnings have been flat for over a year, so they don't really explain why the S&P 500 still went up 15% from the 2018 highs. And now expectations are down substantially and even for 2021 are below 2018 levels.

if a $100 billion dollar company generates $10 billion of profit annually, then that is 10% returned to shareholders every year even if there is no earnings growth.

Sure, with no earnings growth and no price increase shareholders would be richer due to the cash returned via dividends.

But that doesn't explain why the price you pay for $X in earnings is higher in one case than in the other. (Retained earnings could explain a minimal part of the increase.)

There is no reason for that $100bn company to be a $110bn company next year if it has returned the $10bn it earned to shareholders and it's still going to earn $10bn.

A reason could be that the yields on other forms of investment are going down. If buyers are willing to accept a 1% yield because they cannot easily get it anywhere else then the share price can go to $1 trillion, or even further if yield is expected to go up over time.

I would add another factor lots of people overlook: the trend towards index investing. In the past, asset management involved actually analyzing the performance of a business, now it’s just trillions of dollars allocated merely by market cap. Index investing makes everyone QEs bitch - the end game for it is what we’re about to experience.

That's exactly right: index investing is more like a mix of a pyramid scheme and central planning. It's decoupled the stock market from the underlying economic activity.

How do you thinking the individual underlying shares of an equity index fund are valued? The performance of a company is analyzed, and market participants buy or sell shares and derivatives based on their analysis. You can make the argument that an over-reliance on indexing leads to less price discovery, but I don’t buy it.

The people shrieking the loudest about passive indexing are active fund managers.

Managed versus index is to me, open source versus closed source.

With managed funds, you have lots of participants out there eyeing the value of businesses. Everybody can make a buck by taking a peek.

With Index funds, we all have to trust that S&P is doing the right thing.

> With Index funds, we all have to trust that S&P is doing the right thing.

No, you don’t. Here is the document that outlines how the S&P 500 is calculated: https://us.spindices.com/documents/methodologies/methodology...

> Managed versus index is to me, open source versus closed source.

This is also backwards, indices are transparent and open while managed funds are not.

Sounds like an extreme view, many people, even lower income still have retirement funds who are being invested somewhere and they're not taking money out.

Sure, buybacks were responsible for a big part of stock buying activity for awhile. But that has completely stopped now as companies prepare for the uncertain future.

Should look into Central Banks activities...

e.g .BOJ is top-10 shareholder in 40% of Japan's listed companies

Central Banks everywhere are dumping more and more money in the economy. The one from Europe is ready to buy Italy bonds even if its moved to Junk bonds.

>First, a lot of companies don't pay out dividends or buy back stock these days

As I understand it, a good chunk of of the reason stock prices were originally so high before the crash 2 months ago was that stock bybacks were at an all time high (though of course this doesn't mean every company is doing them). Part of the reason companies are so vulnerable is that a large chunk profits were being used to undertake them - not being kept for reinvestment, debt repayment, or rainy-day funds.

Why bother with a rainy-day fund? If your company has a long-term viable business you can borrow money to survive a temporary crisis. If your company's business model is permanently ruined then you are better off calling it quits and shutting the company down than setting your cash reserves on fire trying to rescue a dead company.

During a credit crisis a viable business might have trouble raising money, but with the Fed indicating that they are willing to throw money out of the proverbial helicopters, maybe people don't consider that a real concern any more.

That's a fair point. In theory, or at least in my imagination of running a large business, I still think there is value in keeping a rainy-day fund - but you're certainly right that it doesn't seem like any large companies, aside from those flush with cash like Apple, practice