Hacker News Reader

Comment by newswasboring | Hacker News Reader

> and the last person just holds them 1 day and cashes out at basically break even.

Cashes out how? That is what my confusion is. Shares don't have inherent value so to cash out you need to sell it to someone (sometimes the buyer is the company itself but I don't think that is sustainable beyond few percentage of their shares). Its not like an asset backed currency where you can go to a central bank and ask for consumable resources. (Although most times the asset is also useless, like gold). Its all just floating in the air from my point of view and "value" is just what someone else is willing to pay.

View on HN

But shares do have an inherent value. Owning them gives you a right to a share of the profits. You own a share of the company. You can vote on who you choose to run it - i.e. the board of Directors.

Now many companies recently have chosen not to distribute profits - e.g. Amazon reinvests everything back into growth.

And there are types of share that don’t give you a vote on who runs the company (or your tiny ownership percentage makes it meaningless).

And there are companies that don’t make any profits so there’s nothing to share out!

But shares, at least classically, do have an inherent value.

Edit: Examples of these classic shares are “Dividend stocks” [0], but even with say TSLA or AMZN when you buy a share you’re buying the right to a share of the future profits.

[0] https://www.investopedia.com/dividend-stocks-4689744

Edit2: Now of course that inherent value might be zero if the company will never make a profit…

I understand what a dividend stock is I even mentioned these two concepts in my other post. But condescension aside now we are getting somewhere. So people are speculating on future earning and think profits will grow exponentially. But none of these companies are projecting profits in short or long term and I don't ever see talk of profits from people who are buying these stocks. Functionally it all seems to run on emotions.

Yeah it's strange that the market cares so little about profits, and it runs much on emotions, but that still doesn't make it "wrong" in any way, in my point of view, as a ponzi scheme would. Progress is still being made, and revenue as well.

By the way, I hope you didn't find my tone condescending because I made such simplistic examples, just trying to be helpful, but probably mostly helping myself understand by typing it out :)

Maybe Ponzi scheme is too loaded a term but both have the same failure mode. At some point people will wise up and demand some real returns. It might not collapse but it will stop growing and there will be a knock on effect as so much of it is taken on leverage.

"Wising up" is just the stock price going down. Happens all the time. Dividends are also paid regularly, which is real money in the investors pocket.

Both Tesla and Amazon have never payed out a dividend even though they have had profitable quarters. Plenty other companies have never even had a profitable quarter. Yet the stock price keeps going up.

For most tech companies the value is in the number of users rather than profits. High numbers of repeat users, coupled with growth in the number of users, suggests that the company is on to something.

There is demand for these stocks in part due to the possibility of future profits through the monetization of these users. As well as the possibility of the company being acquired by a larger company (whereby exiting shareholders can sell their shares at high values or acquire shares in the purchasing company via share swaps).

Nowadays there is also a lot of pure speculation going on without any fundamental value considerations. This is akin to gambling, and in a bubble market it can look like the casino keeps paying out as everyone keeps converting their winnings into chips and bets it all again. But the market isn't a casino, and bubble stock values are held up by the demand to keep playing. This is great for everyone until everyone tries to sell at the same time.

I think maybe you don't follow the companies closely enough. The poster you are replying to mentioned AMZN and TSLA.

Amzn's core businesses are very profitable, but they are constantly reinvesting those profits into new areas where they are growing. It's like a conglomeration of start ups, each aiming at future profit. It's like you've invested in one profitable company, and instead of dividends, you are getting shares of new start ups.

TSLA has now been profitable for 9 quarters, recently massively profitable with billions in free cash flow. Analysts are projecting even more to come, with profit margins approaching that of Apple and a total addressable market 10x the size. (I feel like TSLA is one of the few exceptions to the problems the author identifies in the article.). The TSLA bulls that I follow are all talking about future profits and how to discount those to net present value.

I agree those are profitable. Because they are actually selling something. That's a normal company. Talking more about companies which are mostly relying on increasing user count. I get that they may eventually turn a profit. But nobody talk about the profit.

I mean, the companies that are talking about increasing user counts... the users generally are the product, or ads for those users are the product.

Both Tesla and Amazon have never payed out a dividend. If profitable companies are not giving any money how can I expect unprofitable ones to give me money in the future?

When companies generate cash flow from profits, three major things they do with that cash are 1) pay dividends, 2) stock buybacks, 3) reinvest in the company. Shareholder's prefer the company to engage in number 3 if the company can reinvest with high ROI. If they pay the shareholders a dividend, and the shareholder can only invest that at 10%, it's ok but not as good as if the company thinks it can invest and do better.

The "plan" with these growth companies is to reinvest in themselves and keep growing as big as possible until the cost to grow is too much, or the ROI from growing is less than is generally available elsewhere. Only then will they pay dividends or do stock buybacks (which are functionally equivilant, but with favorable tax ramifications). The "plan" is that you hold for 10 or 20 years or more and then get your dividends then. Or sell at a profit sooner, because the stock will be worth more because it will be closer to that future pay day.

You can expect unprofitable companies to give you money in the future if you believe in their business plan and believe that they can execute.

It's supposed to be "the NPV of the dividend annuity." In the event that there is no Greater Fool, the shareholders as a body have some recourse to generate income from the company. So it's not just a Pokemon card.

But I agree no one seems to be calculating this.

I think no one wants dividends because of how they're taxed relative to capital gains

You mean how qualified dividends* are taxed like long-term capital gains already?

* - which is almost all of them

Yeah at this point the only difference is timing of the tax liability, but timing can count for a lot.

Yeah the company can buy back their own shares, or it can get acquired and taken off the stock exchange. The stock can also become illiquid and you can't sell. But as long as the company keeps doing well, it could also just continue indefinitely. The only way it could go through a downwards spiral of plummeting stock price is if they are doing something inefficient or becoming worse. So people that invest in inefficient or bad companies are the ones who will lose, again the goal is to move money from the inefficient to the more efficient. I mean you try to avoid stagnation and luddism, there's always casualties whenever things change, even if it is change for the better overall, and these are the ones who will lose in the stock exchange.

You can also just have really bad luck, invest your whole life savings in a farrier business just before the car was invented, so bad luck can also make you lose but the idea is that the change is for the better overall.

I think we are talking past each other. I'm trying to understand what is the value of one stock apart from speculative valuation. It seems to me you agree that there is none beyond what someone else is willing to pay for it.

Apart from speculative valuation, it's the value of the goods and services produced by the company + it's assets etc.

Has there ever been any case where people were actually able to cash out in that way? Companies to my knowledge tend to fail catastrophically and in that scenario nobody really gets anything. And there isn't a way to "cash out" apart from selling it to someone else.

I owned shares in a company that was suddenly acquired and all shareholders cashed out with a nice profit. This company didn't fail, it just succeeded and disappeared.

This scenario makes perfect sense to me, it's essentially the company buying back all the shares, I don't think it is really significant that another company bought them up instead. You issue shares to raise capital, you invest the capital, you buy back the shares distributing the gains or losses. But what if you never buy back the shares?

I agree that it's not significant, it can also just transfer to being privately owned. Companies go in and out of the stock exchange all the time. The point of an IPO really is that you have some kind of growth or development phase that needs funding, so it's always a kind of "negative balance" and selling a promise for the future. If a company was rock solid with constant profits and no use for additional funding, it would probably be traded below it's cash assets, because there's no use of owning such a stock.

The main point is that invested money is actually used to do things, even if you lose you have contributed to progress and development in some way, it's not like a casino where money just moves around.

Isn't it reasonable to assume that the value of every company will eventually go to zero? In that case - and for simplicity assuming that a share is just a share of the company assets, no dividends, no voting rights, no whatever - wouldn't the shares just transfer money from later shareholders to earlier shareholders until the share reaches it maximum value and starts its decline towards zero after which everyone just loses money? That seems zero sum to me, from the perspective of all the shareholders, the company can of course provide value to its customers and employees. Things would change if you could exchange your shares for the corresponding company assets. In case it's not obvious, I have no clue about financial markets.

It wouldn't transfer money strictly from later shareholders to earlier ones, because that's not fixed as in a pyramid scheme. The people from the failing company should theoretically be doing something even more worthwhile with their time and energy, unless there has been some actual unforseen damage. I mean it's zero sum from the point of view of all the shareholders as a single entity, if they can invest only in one single company, but not the market overall.

Does owning 100% of a good company have economic value, even if literally no one else wants to buy it from you?

If it does, why wouldn’t a fractional share of that company have the same quality?

If you owned all of Coca-Cola, Amex, Disney, or Tesla, anyone would think you were spectacularly well-resourced, even if stock markets didn’t exist or if selling portions of companies were outlawed.

In this case do I get all the profits and have all the governing power?

What else would owning the company mean, if not that? You would have to agree proportionally with the other owners (of which there are none) on who to put in place to run the company.

Then it doesn't map with the present scenario. Because none of these companies have ever payed out a dividend and voting power is almost non existent too.

Buybacks.

If you have a great idea but no resources to realise it, you create a limited liability company, issue stock to the market to raise money to create your business. It's just a way to raise money to create products, inventions etc. Like crowdsourcing except you get a share in the company instead of giving it as a donation for a sticker or a t-shirt.

Edit: a ponzi scheme would be if the company is constantly issuing more and more stock at an ever increasing price, and do not have any other actual revenue but somehow is faking this for the market to believe.

Reply on news.ycombinator.com