Why isnt the stock market a SCAM?

[LegendKiller]

Originally posted by: mchammer


None of this makes any sense for a publicly held company IMO. The market cap of a company and the value of a company are not the same.

My point was that companies *DO* have intrinsic value (BV), ignoring that fact is pretty stupid. A share is also worth as much as it's future cashflows or reinvestment will earn.

It's plainly evident that almost nobody here knows anything about company valuation, which is funny considering everybody tries to opine on it.

When I was in bschool we had to do valuations on two companies and create an analyst report. My group chose WD40 and Krispy Kreme. It was a good project since we utilized all of the major valuation techniques (DAE, DCF...ETC). At the time KK was flying high, well above industry PE levels, WD40 was tooling along. We set price projections based upon a weighting of all of the model's projections.

Our professor gave us a B, because our KK valuation was $10 lower than current price. Before I graduated a few months later, he had filed with the dean to increase that grade to an A, because KK's stock had decreased down to the $10 and it even follows our model now.


Valuation isn't a black box. People deviate from it because they are stupid and greedy. That isn't the stock market's fault, it is their downfall and their problem. Investing on hype or not looking at fundamentals leads to stupidity and the image that there is a pyramid scheme.

 

[BoberFett]

Originally posted by: LegendKiller

Originally posted by: BoberFett

Exactly. Shares represent partial ownership. So why would anybody want to own a part of a company that makes zero profit? Because without paying dividends, that's what owning stock is. It's a company without profit. The only way to profit from that partial ownership is to hope somebody else will purchase your partial ownership for more than you did. And why would they do that? Because they in turn hope to find somebody else to purchase it for more than they did.

Yes, with enough pressure from the "owners" (the shareholders) company policy can be changed. But let's not kids ourselves about the average investors ability to actually do something like that. Unless a person is playing with huge sums of money, there is little that the average investor can do with their share of a company other than hope that somebody else will pay more for that share.

Shares represent partial ownership, not only in the company today but cashflows in the future. If those cashflows grow (higher profit or reinvestment in R&D) through retained earnings, then your portion of those cashflows also increase. While companies may not pay them out immediately, the intrinsic value of your share still increases as your equity share (retained earnings) increases.

Companies that do not have any positive NPV projects should pay out dividends, look at Microsoft. Mostly mature companies pay them out, since they ahve fewer +NPV projects to undertake and do not need the cash. Growth companies will not pay out earnings since they need it for reinvestment in the future.

I don't see why it's such a hard concept.

It's not a hard concept, but how many companies are run to maximize dividend versus how many are run to maximize day to day share price? This alone should tell you that the real money is not in the profit sharing that occurs through paying dividends, but in speculation. Hence, ponzi scheme.

 

[LegendKiller]

Originally posted by: BoberFett
It's not a hard concept, but how many companies are run to maximize dividend versus how many are run to maximize day to day share price? This alone should tell you that the real money is not in the profit sharing that occurs through paying dividends, but in speculation. Hence, ponzi scheme.

First off, lets get something clear.

http://en.wikipedia.org/wiki/Ponzi_scheme

A Ponzi scheme is paying peter the money you just got from Paul as false returns. In a Ponzi scheme, *no* money is created or generated externally by anybody, no profits are created, no products are made, it's an illusion.

Now, companies make money, they just don't pay it out normally. Why? Because they need that money to grow, they reinvest it. You get your returns from that growth in several ways, including future profit and natural appreciation through higher BV and fundamentals.

For example, if the rate of return required by investors (hurdle rate, or IRR, something like that) is 10% and you have a project that returns 12%, then why not keep the cash and undertake the project? Shouldn't you perform the project and earn your shareholders more money?

If the shareholders don't want to invest in your company or the 12% project, they can dividend themselves right out, by selling.

People say "well, companies hardly ever declare dividends now". Well, thats because many companies have moved away from them. Why? Because they are double taxed, both at the corporate level *AND* at the personal income level.

How do they pay them out now? I just received an offer from MSFT to buy my shares in a large stock buyback plan. This is the highest form of dividend payout these days, MSFT buys up the stock, which then creates less pieces in a pie, naturally appreciating the stock. This means you only get taxed one way, through cap gains. However, if you have that stock in a 401k, then your taxes get deferred, when you are old enough they are not taxed.

Amazing how that works!

 

[Albatross]

stock market is a scam.everybody who posted here is hired by the illuminati to screw the common man.down with imperialists!

 

[WolverineGator]

Sigh, one day I hope to post about my involvement in a MLM/Ponzi scheme... it's been in class action litigation for 5 years!

 

[wyvrn]

Originally posted by: LegendKiller

Originally posted by: BoberFett
It's not a hard concept, but how many companies are run to maximize dividend versus how many are run to maximize day to day share price? This alone should tell you that the real money is not in the profit sharing that occurs through paying dividends, but in speculation. Hence, ponzi scheme.

First off, lets get something clear.

http://en.wikipedia.org/wiki/Ponzi_scheme

A Ponzi scheme is paying peter the money you just got from Paul as false returns. In a Ponzi scheme, *no* money is created or generated externally by anybody, no profits are created, no products are made, it's an illusion.

Now, companies make money, they just don't pay it out normally. Why? Because they need that money to grow, they reinvest it. You get your returns from that growth in several ways, including future profit and natural appreciation through higher BV and fundamentals.

For example, if the rate of return required by investors (hurdle rate, or IRR, something like that) is 10% and you have a project that returns 12%, then why not keep the cash and undertake the project? Shouldn't you perform the project and earn your shareholders more money?

If the shareholders don't want to invest in your company or the 12% project, they can dividend themselves right out, by selling.

People say "well, companies hardly ever declare dividends now". Well, thats because many companies have moved away from them. Why? Because they are double taxed, both at the corporate level *AND* at the personal income level.

How do they pay them out now? I just received an offer from MSFT to buy my shares in a large stock buyback plan. This is the highest form of dividend payout these days, MSFT buys up the stock, which then creates less pieces in a pie, naturally appreciating the stock. This means you only get taxed one way, through cap gains. However, if you have that stock in a 401k, then your taxes get deferred, when you are old enough they are not taxed.

Amazing how that works!

This is pretty much how it was explained in my finance class. Thanks for the informative posts LK, but don't get upset at the idiot trolls on the message board. You make your money at work, not AT.

 

[swinger222]

I think the reason people get into the stock market is because they first imagine they'll instantly be rich, like those who first bought google stock.

 

[SP33Demon]

I would suggest getting an investment advisor if this is your first time investing... preferably a family friend if you're so lucky.

 

[vi edit]

Originally posted by: swinger222
I think the reason people get into the stock market is because they first imagine they'll instantly be rich, like those who first bought google stock.

The *absolute worst* are the ones who hear from a friend that hear from a friend that heard it from their mother's aunt's barber's accountant that XYZD Diamond Company is just going to go EFFIN BONKERS! I mean it's only $.001 a share and it's GOING to go up to $1.00 a share IN NO TIME and you can retire rich!!! And people drop $1000 on this piece of crap and they watch it go tits up in 6 months time and they are out their $1000. Plus the $15 a quarter maintenance fee that their broker charged them because they were under the minimum balance requirements...plus the broker commissions...

And then they have to pay the broker another $40 just to send them a certificate that they own a company that literally is not worth the paper that it's printed on. Or pay that much to have the thing wiped from their account so that they can close it.

Those people are the worse. They think the world owes them everything. They think they are the smartest people in the world. They think that it's *THE BROKERS* fault they bought a hunk of sh!t stock that was a scam from the start and they bought into it.

*sigh*

Those people are the worst.

 

[SampSon]

Originally posted by: LegendKiller

Originally posted by: SampSon
LegendKiller and jjsole need to get their little slap fight moved into the PM arena.

LegendKiller, you are acting just like a typical fresh out of the box badass, wagging your cute little penis around thinking that someone actually gives a sh!t.
jjsole, you're just egging the kid on.

Frankly, I couldn't give a flying fluck through a rolling donut whether I impress you or not. I do hate the spread of FUDD.

If you had actually read any of my replies rather than "Ohh boy, lets take the side of the old fart and pick on the "new" kid rather than listening to the truth" while bashing somebody you *think* doesn't know as much because I don't have 20 years of experience. Wow, you are *REALLY* cool!

Instead of doing that, why not read what I posted, then come back.

I read the entire thread. The point was that you're being a high and mighty douche who is incredibly quick to throw a tantrum and beat on his chest while outlining his related schooling experience, when someone doesn't agree with you. Then I was pointing out how jjsole is being a douche by egging you on.

I don't give a "flying fvck through a donut" if you are the most experienced person in your field, you both still acted like bitchy little girls and got the whole thread off track.

Your responses show how you obviously DO give "a flying fvck through a donut" what other people think. You really *ARE* that cool!

 

[LegendKiller]

Originally posted by: SampSon
I read the entire thread. The point was that you're being a high and mighty douche who is incredibly quick to throw a tantrum and beat on his chest while outlining his related schooling experience, when someone doesn't agree with you. Then I was pointing out how jjsole is being a douche by egging you on.

I don't give a "flying fvck through a donut" if you are the most experienced person in your field, you both still acted like bitchy little girls and got the whole thread off track.

Your responses show how you obviously DO give "a flying fvck through a donut" what other people think. You really *ARE* that cool!

Please, I have stated well-known fact the whole thread. You can take it any way you want and obviously you are, because you love to label intent with tons of assumptions. Great job that you can infer everything through simple text, you are certainly a mind reader. My point was that I read more than some book I got from B&N and I know the fundamentals, yet others keep saying "its a pyramid scheme" with nothing to back it up other than tin-foil hat conspiracy theories and complete BS. jjsole did the same, which leads me to believe his whole experience base is filled with BS also. He posts about finance and economics as well as dmcowen does, so I am guessing they have pretty similar experiences (network technicians who don't care about fact).

You can debate how I acted as much as you want, but facts are facts and they back me up.

 

[warbean]

 

[Sureshot324]

The world economy is growing at around 8%, so naturaly the stock market does the same.

 

[bennylong]

What's this thread all about?

 

[IHateMyJob2004]

Originally posted by: Sureshot324
The world economy is growing at around 8%, so naturaly the stock market does the same.

Man, people are stupid ... referring to Sureshot.

Naturally.....

Actually they try growing their businesses throguh expansion .. .via new stores, increased manufacturing, etc. And when funds can't be spent doing that stuff (due to inefficiencies) .... dividends are often paid and stock buybacks also occur.

I could go on, but you are probably right .... naturally .... they jsut do what the world does ...


shakes head