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Comment by iV7B53CmgHjB | Hacker News Reader

This is a great post.

> Many retail investors don’t really care about whether GME’s price is justified by their corporate earnings - they simply buy at any cost. This financial nihilism - where intrinsic value is unknowable and all that matters is what other people think - is a worldview often encountered in Gen Z retail traders

The article makes it sound like as if this is a recent phenomenon. I don't believe that's true. I believe that stock prices, or prices of anything, be it tulips or paintings, have always been driven by narratives. For example, both "fundamental analysis" and "technical analysis" are just different narratives that people have bought into. They then became self-fulfilling prophecies with feedback loops due to their adoption. Some may argue "but earning reports are scientific! It's numbers!" - not it's not. There are so many ways you re-arrange, manipulate, or re-interpret these things. It's just another narrative that has been accepted by a large enough number of people.

Predicting the market has and will never be about "facts" - it will always be about predicting other people's behavior.

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It’s not all Gen Z. I have heard from several friends who are older Gen X guys that they’ve done cash out refinancing to dump money into the stock market. The reasoning is that they’d be idiots not to borrow at 2.5% and put it into stocks. Hard to argue with when the US stock market has a 100 year track record of producing 7% on average.

A couple weeks after hearing about this from one guy, his wife tells me that he made $80k on AMC today. It’s gone up another 3-4x from that day. No idea if he’s still in or not, but this kind of thing feels like the end of days of bubbles. It won’t end well.

Most of the money a retail trader is making comes from another retail trader.

Is a poker table a bubble? Another way to interpret the price is, “the most recent payout at the poker table.”

> A couple weeks after hearing about this from one guy, his wife tells me that he made $80k on AMC today.

Speculative traders like to talk about their biggest wins, but they're generally quiet about losses.

Sure, it's possible that one guy YOLOed everything into a single stock at just the right time, cashed out, and walked away. It's more common for these traders to make a lot of bad bets, then get excited when one of them pays off. The problem gets worse when these payoffs come in the form of black swan market events that the trader just happened to be on the right side of.

Or maybe I'm wrong and the meme stonk trend will continue forever, making the gamblers wealthy while the rest of us lose out.

Speculative traders like to talk about their biggest wins, but they're generally quiet about losses.

Um, yes. This is zero-sum. There have to be a lot of losers out there.

Stock markets are not zero-sum. Derivatives markets would be, though

Derivatives markets are zero-sum measured in currency, but few people/organizations have perfectly linear utility functions. Transferring risk from more risk averse people to less risk averse people is not necessarily zero-sum if the accounting is done in utility instead of currency.

I buy Microsoft at 10 and sell to you at 20. You then sell at 30.

We have both won and clearly no one has lost. Cash equity Markets are not zero sum.

Who did j sell to and who did You buy from?

Follow the trail all the way down to QE by the federal reserve. Everyone wins! There are no losers!

Follow this chain and ultimately you'll discover the concept of credit creation, where banks lend the same money to multiple people.

It really is not a zero-sum game.

You have not factored in the person that I sold it to for 30.

It depends on your perspective. The act of speculation is zero sum, but holding onto the stock and letting it appreciate isn't zero sum. Seeing how "speculative traders" are in it to make more than the 8% average (or whatever), we're probably talking about the former and not the latter.

I’ve been on wsb for years and Ive seen more loss porn than gains up until relatively recently.

I think the current stonks situation and folks involved are a bit more nuanced than you’re implying here, but I can certainly see how you might come to such a conclusion from the outside looking in.

The cultural shift of not posting “loss porn” on WSB is going to be the undoing. Well, the eternal September it’s been going through since this time last year has been a big contributor too.

I'd guess that a lot of the WSB crowd has some exposure to crypto, which isn't doing so hot recently.

I don't see how gamblers make you lose out.

There's no way to tell if stocks going up is a bubble or not. But if you never invest when stocks are going up, you'll never make money.

The meme stock thing is very different than the S&P in terms of state of the market.

When denominator is M2 money supply, the stock market doesn't look bubbly at all..

I think the difference is the people buying tulips did genuinely believe in their investment whereas Millennials & Gen Z seem have more of a FOMO/YOLO outlook. The tulip buyers (or even the sub-prime mortgage backed security buyers or whoever) bought in to the underlying economic system but a lot of Millennials/Gen Z (and even some Gen X) see the economy as “everything is made up and the points don’t matter” so they figure they might as well try to ride the meme stock wave.

I worry historians will look back on this unusual market activity and wonder how we missed the generation backed into a financial corner by a system stacked against them who are clearly lashing out and in need of help. We’re mildly amused and sometimes annoyed but not taking them seriously. And I think the resulting financial frustration from these “meme stocks” will be even worse than the financial frustration that gave rise to them in the first place.

> a system stacked against them

How is investing in stocks stacked against people?

Wrong system.

System as parent comment alluding to is "the world". Many latest/last gen people feel as though it is highly unlikely they will ever buy a house, for example. It is simply not feasible for most of them given wages vs house price increases.

I think the YOLO thought process is:

" If you're fucked anyway, why not bet everything you can borrow?

Worst outcome: you're slightly poorer. If that is possible.

Best outcome: you're rich! "

Not one I agree with, but I can see how people get there.

I mostly agree with you, but I’m not sure where you get the idea that “we missed the generation.” Everyone seems to know that Gen Z is coming of age into a dead end. It’s just that we’re all more interested in using the situation as a political tool than in actually doing anything about it.

In the short term I agree, but in the long term the market is still a weighting machine (not a narrative driven voting machine).

Indeed, I think that's why stonk investing is associated with Gen-Z: they didn't invent mimetic desire, they just happen to be young enough to not have seen the "weighing machine" part of the cycle with their own money.

Can you elaborate more? I understand that they didn’t invent memetic desire (no one did it’s a innate human behavior from girard pov) but don’t understand the second portion of your comment

Until you lose most of your money in a bubble, you don't really get bubbles - they seem like something that only happens to other dumb people, not to you.

The most obvious, recent, and one of the biggest being the subprime housing bubble in the US.

Everyone who wasn't buying a house looked like a moron for 3 years as prices were going up >10% per year (on 33:1 leverage, if not near infinite leverage - a lot of these were no money down).

The average family was making more money in appreciation on their house than working their jobs.

Isaac Newton was not exactly a moron, and he lost all his money TWICE in the South Sea Bubble: https://royalsocietypublishing.org/doi/10.1098/rsnr.2018.001...

> This paper shows that Newton did not just taste of the Bubble's madness, but drank deeply of it. His losses, even by conservative accounting, almost surely exceeded £10 000, and plausible methods easily produce values that exceed the £20 000 figure that family lore claimed, and which is frequently cited today. By comparison with typical earnings, and making allowances for a very different society and economy, £20 000 in 1720 might be comparable to £20 million, $20 million, or euro 20 million today.9 However, before the Bubble, in the 1710s, Newton's investments appear to have been those of a careful and shrewd person, and to have been very successful. Newton died rich, with an estate valued at about £30 000, but that is primarily because he was already rich on the eve of the Bubble.

Not GP, but I think what they mean is that most of gen Z has not yet seen a serious downturn with their own eyes and with their own money in the market. On one hand they have older generations telling them to watch out and that bubbles never last, but on the other hand all their own experience has ever told them is that stocks pretty much only go up and that meme stocks go up way more than "boring" companies with allegedly better fundamentals. It is a very human instinct for these gen-Z investors to trust their own observations much more than the advice they get from other people.

The argument is that eventually a crisis will come again (as it has done repeatedly every 10-20 years for centuries) and then the boring companies with big buffers and lack of risky behavior will be much better positioned to weather the storm, while many of loss-making companies in declining industries (yet with very high share prices due to meme stock status) will suffer more and possibly go bankrupt. That is the "weighing" part of the stock market boom/bust cycle as opposed to the "voting" part of the stock market that is currently exemplified by the stonks investing community.

But in the long term we are all dead.

Pretty often (but not always), the time periods in which the market becomes a weighing machine is only a couple of decades. The long term in which we're all dead is significantly further away.

Most of the time only a single decade is sufficient to flush out high-flying hype and revert back to fundamentals. How close we are to that point now is anyone’s guess.

Thanks for nothing J M Keynes ;-)

Only someone who never had children would say something so nihilistic

Read the full quote, it's not nihilist at all.

I agree but the short term can impact the long term. AOL bought Time Warner. AMC is raising ridiculous amounts of new capital that gives them a lot of breathing room to figure out a future for the company.

I remember reading newspapers as a kid which were so excited by how Time Warner was modernizing by acquiring AOL. Meanwhile, I was twelve years old and sitting there thinking, "AOL is a dinosaur, too."

I wouldn't have bought AOL shares, but the folks who did and sold them around the merger would have done well for themselves, even if I was right about AOL being a company whose time had passed.

I don't think you can claim its entirely narrative driven so long as stocks continue to represent equity stake in real companies with real revenue liabilities and assets.

Sure, the market price is largely driven by human behavior, but so long as stock ownership represents a claim on real assets the base value of that stock (which can wildly differ from the price) can only be as narrative driven as the value of those assets.

Unless you want to argue that commodities themselves are priced largely by narratives rather than real utility, but that's a stronger claim.

> Predicting the market has and will never be about "facts" - it will always be about predicting other people's behavior.

It will be a combination of both, as different people will react differently to the same facts about a company and the market/economy. And there's no way to predict ahead of time when these new facts / information will appear (e.g., lawsuit against a company), and so fluctuations will occur 'randomly' over time:

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Disagree. The whole premise of fundamental analysis is to justify the stock price by its corporate earnings, which is at least expressing an interest in corporate earnings. Forecasts of such earnings may sometimes be wildly wrong, sure, but this is still qualitatively different than "GME to the moon" which never pretended to bother about the earnings to begin with.

> The whole premise of fundamental analysis is to justify the stock price by its corporate earnings

Isn't this an example of the GP's point?

There's no intrinsic reason for earnings to be directly related to stock price.

Like you said, it's a justification not reasoning.

Say I’m offering a contract to pay you $100 every month for as long as I'm alive.

Would you buy that for $1? What about $1M? Something price in-between? Does the price change if it’s Bill Gates offering? What if it's the US government? Does it change based on your life expectancy, the tax treatment of that $100, expected inflation rates, if a bunch of investors want to buy this contract, or if the payment is “maybe $100, but sometimes more or sometimes less, within a reasonable range”?

There is a calculable and narrow band for the fundamental price of this contract, and it’s intrinsically based on two things: how much I promise to pay back (~return) and how believable it is (~risk).

"Corporate earnings" are equivalent to this monthly payment, just the payments take the shape of dividends, or share buy-backs, or reinvestment which promise even greater corporate earnings.

Many stocks don't pay dividends and re-investment is extremely fuzzy and hard to value because it depends on insider knowledge.

In the US specifically, issuing dividends is a suboptimal strategy for returning money to shareholders due to taxation. While dividends are common elsewhere, the two standard strategies in the USA are share buybacks and reinvesting into growth. Buybacks work because increase demand + reduced supply = your holdings go up. Reinvestments work because higher returns in the future = people will buy the contract from you for more than you paid for it. In either case, it's the equivalent of the company "giving" you $X that month, just not as a bank transfer but as capital gains that you can shuffle as per your tax strategy.

>... and re-investment is extremely fuzzy and hard to value.

Yes. And the more this is true, the more that "stock" becomes a "stonk".

> There's no intrinsic reason for earnings to be directly related to stock price.

Yes there absolutely is. If you are the owner of a company you may divert the future earnings to your own bank account, which has a precisely defined value.

Your counterargument may be that minority shareholders never have the power to affect distributions of earnings, but that is also false. Minority shareholders at minimum hold the power of arbitrage between majority shareholders.

> There's no intrinsic reason for earnings to be directly related to stock price.

You are buying a share in an income stream! You are using your money to buy money! If there is no intrinsic reason for this to have a price that is measured in money, where exactly do you think a price measured in money is appropriate?

Corporations are not required to share their income stream with investors, either directly through dividends or indirectly through buybacks. The "income stream" concept is only theoretical.

If they don't, and can't demonstrate that they're doing something else useful with that money, investors get angry and fire the board.

That assumes that companies will pay dividends and your can get a good estimate of future yield to value. Corporate earnings are a proxy for potential future yield when there might be future yield. But most large tech companies don't regularly (or don't ever) plan on doing that. We're left with a proxy that no longer works in most cases and in the cases it can, has already been arbitraged so that retail investors won't be buying future cash flows through dividends at reasonable rates.

Dividends are not the only way to distribute earnings; stock buybacks are a very popular method as well.

Stock buybacks are, if anything, often considered preferable to dividends, because they allow people who invest outside of tax shelters to control whether or not they want to have taxable income this year (by selling the stock on their own schedule, rather than getting a dividend on the company's schedule).

Yes, it assumes you can get an estimate. Yes, this assumption can be problematic. Yes, there are limits. But, again, even the most problematic estimate is leagues ahead of "diamond hands, diamond hands, GME to the moon".

No, "yield" in terms of dividends is not necessary. Owning a share in a company that puts cash in a bank account is also worth money.

> assumes that companies will pay dividends

The most powerful practical enforcers of valuations are M&A and debt financing. Both are highly dependent on cash flows. You can narrate a stock up and down until the cows come home, but acquisitions and debt will set a fundamental floor based on economic reality. (There is no similar mechanism limiting upside given our cultural aversion to short selling.)

That’s a very postmodernist framing… the difference is that some narratives are better models of reality than others. I agree that earnings reports are so stage-managed as to be almost completely devoid of real information content, but what if you had unrestricted access to the company’s books? What if you could look into their sales database? Equities are a fairly standardized legal claim to quantifiable value, and this may not seem to factor into the market price much nowadays, but it is a qualitatively different kind of narrative than “sentiment”.

> "The article makes it sound like as if this is a recent phenomenon. I don't believe that's true. I believe that stock prices, or prices of anything, be it tulips or paintings, have always been driven by narratives. "

That might have an element of truth, but recent generations have had opportunities for "financial nihilism" well in excess of anything imaginable by earlier generations, in line with the availability of information, speed of communication, and access to services. Just looking back two or three generations, you got your stock prices in the daily newspaper, you didn't have computers to draw out all your fancy technical analysis charts (although if you were patient you could make charts with pencil and paper), almost no one had access to a stockbroker, and of course there wasn't an internet where you could read about meme stocks or the latest cryptocurrency scheme.

> almost no one had access to a stockbroker

That isn't true. My dad invested in stocks starting in the 1940s, investing his Air Force pay (which wasn't much).

I started investing around 1980 at Boeing, and lots of the other engineers did, too.

Just phone up Schwab or Merrill Lynch or whatever, they'll send you the forms, and off you went.

“Fundamental analysis” is not merely a narrative, though. For example for a mature company, there is an underlying economic reality about the time frame you can expect to earn back your initial investment in dividends, and the subsequent ROI.

At the end of the day its a model and all models are fallible because they cannot perfectly capture reality.

Fundamentals is a narrative that assumes a lot of things like the stability and idealization of a businesses operating environment. These are just baked into the narrative in such a way that they seem “objective” and a part of the “economic reality”.

Yuval Harari’s Sapiens and Taleb’s Black Swan make really compelling narratives that everything is a narrative.

What would a compelling narrative that everything isn't narrative look like?

Financial post-post-modernism? Interesting, perhaps something like Micheal Hudson's take, but I don't how to apply it to valuation of stocks.

Mature companies that do not pay back dividend or buy back shares also exist and are still valuable (eg amazon).

At some point, they stop growing, and will be expected to pay a dividend. Apple and Microsoft pay dividends. Failure to pay a dividend is seen only in companies where the founders have a stock scheme which keeps them from being out-voted.

This feels similar to when people describe poker as a game of luck. It's easy to dismiss skill if you haven't played enough hands.

It doesn't sound to me like the GP is dismissing skill, just pointing out that people rather than facts drive the market.

That's fair, skill is the wrong word. My point was that there are underlying fundamentals (as a stock is partial legal ownership), but they can often be obscured by the noise in the short run.

The difference is that on a long enough time horizon the best poker players clearly beat the averages.

On a long enough time horizon, individual stock pickers very very rarely beat the market as a whole to the point where its hard to argue what they've done is skill and not blind luck.

The usual counterpoint to this is the essay "The Superinvestors of Graham-and-Doddsville": https://www8.gsb.columbia.edu/articles/columbia-business/sup...

TLDR: If it was really blind luck, you would expect the people who beat the market to come from a wide variety of stock picking philosophies. Ie, some technical analysts, some fundamental value investors, some momentum traders, some "throw a dart at the newspaper" people, some sector investors, etc etc etc. However, if you look at the investors who have consistently beat the market over many years it turns out that the majority of them came from a single school. The statistical chances of that happening as a result of pure chance are so small that the alternative hypothesis (ie those investors actually do have an edge, like good poker players) becomes very likely indeed.

There's a few layers to this.

If you want higher than market (average) returns, there are known factors that you invest in that have higher expected (but not guaranteed) returns:

* https://en.wikipedia.org/wiki/Fama–French_three-factor_model

Buffett's historical success has been quantified in light of this:

* https://www.aqr.com/Insights/Research/Journal-Article/Buffet...

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185

Also worth noting that Benjamin Graham, in his very last published interview (Financial Analysts Journal, 1976), stated:

> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

* https://valuehunter.files.wordpress.com/2009/05/conversation...

Now there are lots of folks that don't bother listening to his advice, and take an active role in the market. But empirical studies have shown that, generally speaking, the more active a person is the worse their results tend to be. We've know this for at least fifty years:

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

And even the professional folks who spend their working life generally get it wrong:

* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...

Over the course of 20+ years of investing, you're more likely (>85%) to make more money by simply buying passive funds that follow major indexes (S&P 500, Russell 3000, MSCI EAFE), why bother with the extra risk? Is the extra potential (not guaranteed) return really needed to meet your financial goals? If you can (e.g.) retire comfortably getting 'only' 6% returns, why bother chasing (say) 8-9%? Having more money isn't necessarily a bad thing, but what are you trading-off chasing for it?

The odds are not on your side if you think that you're one of the folks that can beat the market, especially over a time period of 20-30 saving for retirement (and then 20-30 years in retirement). The extra returns are generally not 'free': you're taking extra risk for them.

Of course one often hears about the 'superinvestors' that made it, but what about the (probably many more) people that did not:

* https://xkcd.com/1827/

As for luck versus skill, this has been studied:

> When we turn to individual funds, the challenge is to distinguish skill from luck. With 3,156 funds in our full ($5 million AUM) sample, some do extraor- dinarily well and some do extraordinarily poorly just by chance. To distinguish between luck and skill, we compare the distribution of t(α) estimates from ac- tual fund returns with the distribution from bootstrap simulations in which all funds have zero true α. The tests on net returns say that few funds have enough skill to cover costs. The distribution of three-factor t(α) estimates from net fund returns is almost always to the left of the zero α distribution. The extreme right tail of the three-factor t(α) estimates for net fund returns, however, is roughly in line with the simulated distribution. This suggests that some managers do have sufficient skill to cover costs. But the estimate of net return three-factor true α is about zero even for the portfolio of funds in the top percentiles of historical three-factor t(α) estimates, and the estimate of four-factor true α is negative. Moreover, the estimate of true α for funds in the top percentiles is no better than the estimated α (also near zero) for large, efficiently managed passive funds.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021

* https://mba.tuck.dartmouth.edu/bespeneckbo/default/AFA611-Ec...

Basically: the larger the portfolio, the more skill you need to beat the market (especially on a risk-adjusted basis) over time. Get 'too big' and you tend to run out of runway on your skill (at which point just go passive). This cross-over point is different for everyone, but you won't necessarily know where your's is ahead of time, and so initial (skilled) success may end unexpectedly and suddenly.

It’s very easy to argue rhetorically that it’s all luck, but the point does not stand up to any kind of rigour at all. Even if you make extremely conservative estimates, just one of the top funds is microscopically unlikely to arise via chance, let alone the multitude that do. Renaissance Technologies alone cannot be explained as random.

The price of GME and AMC are not justified by fundamentals at this point but thats irrelevant, it’s the desire to squeeze out the hedgegfunds who never covered their shorts that’s at stake here. Thats what is attractive about it and that is what has people buy these stocks and hold. Shortsellers meanwhile had large losses and continue to lose on a regular basis. They may be up to something..

Bitcoin?

I joke, Bitcoin does (sort of) have an intrinsic value: the cost of the electricity to mine a new Bitcoin. If that's higher than the cost to buy an existing Bitcoin, you'd do the latter. So the cost of mining (in electricity-dollars) sets a floor on the price of Bitcoin. (The ceiling is due to the financial nihilism described above. Same with gold and silver.)

> If that's higher than the cost to buy an existing Bitcoin, you'd do the latter. So the cost of mining (in electricity-dollars) sets a floor on the price of Bitcoin.

You are describing production cost. Not intrinsic value. Once someone decides to buy a Bitcoin, the build or buy decision is as you describe. But that demand is what causes the value. Not the production cost.

This is even true with houses and land value - a house didn't get 10x more expensive to build in the last 50 years, but thsts what people are willing to offer for it.v

There's 3 circular things at work there - land value has gone up, interest rates dropped making total cost of ownership go down, and therefore the land value has gone up creating a good investment.

If I borrow 500k at 1% interest I'll pay back 565k in total over 25 years. At 6% I'll pay back close to $1m. Or to put it another way, the collapse in interest rates have almost halved the total cost of a house. Now, house prices are twice as high because everyone has access to low rates, but as well as this houses look like a fantastic investment - it's doubled in value! It's going to the moon!

> a house didn't get 10x more expensive to build in the last 50 years

It got 10x (or more) more expensive to get approval to build dense housing in decent locations.

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