I think you have to differentiate between income stocks and growth stocks. Income stocks pay regular dividends and the stock price stays pretty flat. So you might get a 10% yearly return on your investment in that company.

Growth stocks invest most or all of the profits back into the company. So you won't get regular dividends but the size of the company will increase rapidly, and the value of your shares will too.

I see what you're saying though about what tangible value does one single share have if it doesn't pay dividends. But if it had no value then that means a big shot could buy a really profitable company for really cheap. Then he could collect the profits or re-invest the profits or whatever. Either way, the profits are his. And even if you own 1/1000th of a company, then 1/1000th of the profits belong to you. You only get 1/1000th of a say in whether those profits are cashed out or re-invested for bigger profits later on.

Dear Bitt,

You are dumb. Bring our ball back.

John

If Bitt’s truly done with this thread then it doesn’t make much sense to continue. However, giving it one last stab:

Say a company offered something called a “Coolness Certificate” (cc) that you could purchase as an investment. The notion being that the company promises to do everything possible to become more “cool”, and in doing so will raise the value of your cc shares. The value in these shares would be that they would increase as the companies “coolness” does, and you could sell them to other investors when you feel that the value has peeked- perhaps you get a sense that the company just isn’t as cool as it used to be. This system works as long as all the investors buy into the notion that the coolness of a company and the value of the cc shares are linked.

Most of the arguments in this thread in favor of stocks having actual value would apply to the above scenario of “Coolness Certificates”. They have value as investments because people want them- the actual value as related to the company isn’t important (in fact, it doesn’t exist). Of course, the moment someone wakes up and realizes that neither is the emperor wearing any clothes, nor is there any correlation between a company’s “coolness” and the shares people have purchased, the whole system comes crashing down.

So what is the difference with stocks? As I see it, stock ownership has the potential to control the destiny of a company, therefore stock does correlate to the perceived value of a company, unlike cc’s to a company’s “coolness”. The more value a company has, the more value there is of being able to control. That most people don’t have enough shares to wield any kind of control is inconsequential, because there are some that do. People do use their shareholdings to control companies, and those holding small numbers of shares are riding on their coattails, as it were.

Or that’s how I see it, anyway. If I missed the point completely or am merely re-treading the same tired arguments, then I apologize.

I'm responding here because Jeff's argument makes sense to me and we can call it quits, but I want to try to explain why you're totally misinterpreting my points:

Quote:
Nothing has monetary value if you refuse to sell it.

Never once have I said that the stock must have monetary value in order to have value. At the same time, I don't see that it has any other sort of value, either. To back up in your post, you kinda make my point for me:

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Its like saying that a car doesn't have any value if you don't drive it.

Correct. A car has both value in its utility (in the case of a car, its ability to get you from one place to another) and its potential resale value. Its potential resale value is based on its utility. (Even if, in some cases, that utility is awfully abstract, like making the owner feel like he looks cool.) A stock's potential resale value must also be based on its utility. That utility is the inherent value I've been talking about, and it need not be monetary in nature. Your argument so far, as far as I can fathom, is that its utility is that it can be sold for money. But the fact that it can be sold for money is based on its utility. It's like saying that Windows has the best applications because it's the best operating system, and that it's the best operating system because it has the best applications. That's a completely circular argument, and a classic logical fallacy: "circulus in demonstrando".

Again, my point is that any item must have some sort of inherent value (or utility), even if it's abstracted, in the case of currency, for example, for it to have any resale value. And my argument is that stocks are sufficiently abstracted to make their connection to the issuing company extraordinarily tenuous.

I said in my last post that Jeff's argument made sense to me, and I thought it did, but now that I'm sitting down to explain how it does, I find that it doesn't.

It's a good first step, though, comparing it to something that is as similar as it can possibly be, but which demonstrably has no value at all.

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The more value a company has, the more value there is of being able to control.

Maybe my problem is that I don't see any value in the ability to control.

I do see the value in dividends, obviously, and maybe I'm overestimating their rarity. And I suppose I can see the value in potential dividends, though that's a lot closer to gambling to me.

BTW, I didn't mean to offend anyone with my Kool-Aid reference. And, for the record, it's not like I think it's all some big conspiracy, or that people don't make money. And I don't have a problem with anyone playing the stock market (or gambling, for that matter) -- I'm just of the opinion that the whole concept has clay feet, and therefore would never do it myself.

Bitt,
I've avoided weighing in, since so many have made points I agree with (voting, dividends, mainly).

Let me pose to you this hypothetical question. Say a company were public, but there were only two stockholders, one with 51% and one with 49%. The company has a record of consistent 12% profits, and has never paid a dividend - they have several hundered in million in cash accounts. Gross sales are 100 million per year. Is that 49% share worthless/of no value simply because it is a minority share and therefore cannot control board membership?

It seems to me that your arguments to date would say yes, that this 49% has no intrinsic worth - no dividends, no meaningful voting rights.

Am I incorrect in that interpretation?

-Zeke

Also, one other point for Bitt concerns the price to earnings (P/E) ratio. To keep the numbers simple, let's say we have a hypothetical company which makes a profit of $1M/year. There are also 1M outstanding shares (for a profit of $1/share). Clearly, if you bought all the shares for $1/each, then you would control the company and would recover your investment in a single year if you chose to pay yourself that entire profit as a dividend. Unsurprisingly, if the stock were trading at $1/share (and having a P/E ratio of 1.0), that would be very attractive for exactly this reason. And, as a direct result, the share price (and the P/E ratio) would increase and the market would eventually reach a price equilibrium.

If you look at various stocks, you'll see P/E ratios all over the map. To pick a random sampling of stocks, Ford's P/E ratio is 7.58. 3M's is 18.25. Google's is 69.07. Ford and 3M pay dividends (5.1% and 2.5%, respectively), while Google doesn't pay any dividend.

So, if you were to buy a controlling share of Ford and were to pay yourself massive dividends, you could recover your investment in eight years, versus 18 for 3M. However, the market is more concerned that Ford will collapse under a mountain of its own debt. Thus, Ford shares are less valuable than 3M, despite the fact that they're paying out twice the dividend rate. Still, the prices aren't random at all. They make perfect sense. I'd argue that no Kool-Aid is necessary to wrap your brain around how Ford and 3M are priced and you could probably even derive those prices from first principles.

Google, and any other "growth" company, require some amount of Kool-Aid to understand. Unlike many of the earlier dot-com bombs, Google is actually making heaping piles of real profit, so there's clearly "value" in its shares. However, those higher P/E ratios stocks tend to also have higher price volatility, precisely because the stock prices is being driven more by emotions and less by hard "value" data, as with Ford or 3M.

Maybe we can invent a "Bitt Index", where a low-numbered value says an investment is concrete and sensible, and a high-numbered value says an investment is pure Kool-Aid. If you buy a government or blue-chip corporate bond and hold it until it matures, they're promising to pay you back your money with a fixed interest rate. Your profit is entirely predictable. That should have a nice, low Bitt number, but it's also generally going to have a lower return (these days, under 5% yield). You can also trade those bonds, prior to their maturity. They still have a guaranteed payout to the bond holder when it matures, but the price of the bonds will fluctuate. So, bond trading, of the very same bonds, would seem to have a higher Bitt number. Of course, bigger bond profits happen when you get "junk" or "emerging market" bonds, where there are legitimate concerns about whether the bond issuer will actually pay out when the bonds mature. In order to overcome this, the bond issuers have to promise higher returns. More risk, higher Bitt number, more potential reward.

Stocks, like bonds, will have variable placement on the Bitt Index. If you own 10% of your cousin's auto parts store and he pays you a hefty dividend every year on his profits, then you would probably give that a reasonable low Bitt number. As the percentage of the firm you own goes down and/or the dividend rate goes down, the Bitt number increases. But, what if you cousin wanted to reinvest his profits to expand his store, rather than paying you a dividend? He might be able to pay you more dividends later on. Higher Bitt number, more risk, more potential reward.

Hmmm like buying useless web domains in the hope one person will buy them for an inflated price.

Yeah, that was exactly the scumbaggy example I was thinking of.

Good question. Unlike stocks or domain names, someone has to own land. There's not really an unowned state (any more). So I'm going to say that it's less offensive.

Note that I think that a valid use of land (and other things, for that matter) is to prevent someone else from doing something with it you don't want done. Like I might not have any use for a piece of land, but I don't want a potential buyer to stripmine it.

When did this turn into "Bitt Explains It All"?

I'm having trouble understanding your lack of understanding when so many examples of value have been given!

Owning part of a company has intrinsic value. You own part of its infrastructure and assets, its patents and copyrights, its trademarks and brands. All of those have some value. You also own part of its future profits and losses.

The expectation is that the company will be profitable. When that happens it will pay out dividends. Except, sometimes it is better for a company to invest in itself instead. This is frequently the case with emerging business sectors where companies compete to garner market-share - the expectation is that the larger the market share that a company has, the more product it can sell, and since it aims to make profit from each unit of product, the more profits it will generate. If they can gain a large enough market share they may be able to gain an effective monopoly, allowing them to dictate prices and profit margins (eg Microsoft) So the company grows, increasing its intrinsic value, making your share of the company worth more and more. Stable business sectors usually contain companies that pay dividends.

You can _always_ sell your share back to the company for its intrinsic value.

Yes, I did just write that.

Note that I didn't say that you could go and knock on the CEO's door and ask to 'redeem' it. But if you were, he would almost certainly buy it from you. He'd have to be drinking Kool-Aid to not do so.

Why?

Because the intrinsic value of a share is nearly always significantly less than the market value. The company could buy that share from you and resell it for an easy profit. But why would you sell it to back to the company when you could get a better price on the open market yourself? (Unless _you_ were drinking the Kool-Aid)

The intrinsic value of a share is based on the tangible assets of a company. The moment that the market price drops below the intrinsic value, the company is going to buy back shares. The major stockholders are going to demand it - each share removed from the market increases their percentage of control and profit. Eventually, if the market price stayed forever below the intrinsic value (which raises for each share removed from the market), you'd end up with a handful of stockholders holding all the remaining stock, at which point they'd probably liquidate the company to extract its intrinsic value straight into their bank accounts.

But of course - how could this happen? It obviously cannot. Stockholders get smart and realise that they could be amongst those getting the big payouts, and refuse to sell for that price. Other non-owners realise that they could buy stock and be amongst them too. Supply, demand. The market price quickly rises to an equilibrium.

The market price is based upon the intrinsic value and other intangible factors, such as expected profits, market share, market outlook, etc. As such, the market price defines the perceived value of the company, which fluctuates as perceptions shift. Obviously, the company itself can affect these perceptions. That is why the SEC exists, to bring regulate how a company must report its accounts and financial outlook, and also prevent employees with privleged information from profiting on the stock market due to that knowledge.

Stock Exhanges are a convenience. Since the company does not participate in most transactions, forcing buyers and sellers to move their transactions through the company would be inconvenient. You'd need to contact each company that you'd want to trade in. Originally this was the case. It soon became apparent that there was money to be made in being a broker or dealer of several stocks, and soon after that groups of brokers and dealers collected together to form clubs dedicated to extracting money from brokering and dealing in stocks. Thus begun the stock exchanges that became a far more efficient vehicle for buying and selling stocks than dealing with the company directly. This is the reason that you don't redeem stocks to the company. It's too inefficient. Companies basically outsource this process to the stock exchanges and participate to buy and sell stock in the open market when appropriate (eg IPOs and buy-backs)

Would something like this help?

Not really. Google - "annual dividend" stock list.

Close, but I wasn't looking for any qualifiers

That list has about 800 stocks shown that meet his criteria, but he also said that more than 1,900 fit the criteria before he took speculation into account.

There are a ton more that are outside his search criteria.

-- Tim

Not perfect, but not bad, either.

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To qualify for the Big List, a stock must have a minimum 1.75% estimated dividend yield. When I last checked, more than 1,900 stocks met that requirement, too many to list here.

AmEx lists 808 stocks, NYSE 1366, and NASDAQ 3300. That's probably the vast majority of stocks traded in the US, right? So that's 5474. And about 1900 pay dividends that are worth much of anything. So about 35%. More than I thought.

Reuters has a stock search tool. They list 8914 US companies, 2653 of which have an Indicated Annual Dividend [1] greater than zero, and 2645 have a Dividend Yield [2] greater than zero. So about 30%.

[1] Indicated Annual Dividend: The total of the expected dividend payments over the next twelve months. It is generally the most recent cash dividend paid or declared multiplied by the dividend payment frequency, plus any recurring extra dividends.

[2]Dividend Yield: This value is the current percentage dividend yield based on the present cash dividend rate.