Does stock market create wealth?


by Tosh5457
Tags: market, stock, wealth
BWV
BWV is offline
#91
Jan9-13, 09:37 PM
P: 328
Quote Quote by enosis_ View Post
I agree - but as link indicates - it varies by industry. The fun starts when a company has negative earnings (a loss) but still maintains an industry multiple.
Multiple of what? Not of earnings obviously

Investors are smart enough to discern that a company currently losing money may not do so in the future and price the stock accordingly
russ_watters
russ_watters is offline
#92
Jan9-13, 10:13 PM
Mentor
P: 21,999
Quote Quote by enosis_ View Post
I agree - but as link indicates - it varies by industry.
As well it should. Growth industries will have higher P/E ratios than stable industries because they are growing faster. So tomorrow's predicted earnings are expected to be much higher than today's. Basically, the earnings are expected to "catch-up" to the P/E ratio.
enosis_
enosis_ is offline
#93
Jan9-13, 10:38 PM
enosis_'s Avatar
P: 120
Quote Quote by russ_watters View Post
As well it should. Growth industries will have higher P/E ratios than stable industries because they are growing faster. So tomorrow's predicted earnings are expected to be much higher than today's. Basically, the earnings are expected to "catch-up" to the P/E ratio.
Yep - except for those situations when they don't.
russ_watters
russ_watters is offline
#94
Jan9-13, 10:45 PM
Mentor
P: 21,999
Quote Quote by enosis_ View Post
Yep - except for those situations when they don't.
Sure -- it's a prediction. Sometimes predictions don't pan out.
nitsuj
nitsuj is offline
#95
Jan10-13, 01:54 PM
P: 1,098
Quote Quote by russ_watters View Post

And incidentally, since you were non-specific and you worded it badly, the case you described was for one shareholder: You set up the company and sold the entire company to me, making me the sole owner of the bar of gold. But since I know you meant there are multiple shareholders....it is still wrong. The bylaws may or may not include direct voting on policy. If the voting is direct, all you have to do is convince 50%+1 shareholders to vote with you. If the voting is indirect, you just have to do the same except electing a representative who will do what you want.
It was really poorly worded, even to say I sold the company to you doesn't makes sense. I'll refine it more, just need to review the accounting.
Tosh5457
Tosh5457 is offline
#96
Jan10-13, 06:44 PM
P: 223
Quote Quote by russ_watters View Post
Right: the growth happens BETWEEN the transactions. Those are the "events" Tosh doesn't want to consider.
Russ, please use the game theory formulation, it simpler to discuss it. Yes, that happens, and what that means is that more players will come into the game (more capital to be invested). That doesn't change the nature of the game, like more players coming to a poker cash game table doesn't change the fact that poker is a zero-sum game (excluding house commissions).

You don't accept the fact that the company growing doesn't give the stockholders any direct benefit. The only benefit they'll have, in average, will be to see their stock rise in price because of others investors expectations rising. But a game just made of transactions will always be zero-sum. It doesn't even matter if the stockholders have the power to change something in the company or not, if they're not getting any of the profits companies get, they can only show a profit by selling their stock in the secondary market. And again, that's just made of transactions, it's zero-sum.

Anyway, I still haven't understand something. Russ, are you trying to say the stock-market isn't a zero-sum game in respect to the profits of the stockholders, or are you saying that only analyzing profits doesn't make sense, and something is missing?
BWV
BWV is offline
#97
Jan11-13, 02:24 PM
P: 328
Quote Quote by Tosh5457 View Post
Russ, please use the game theory formulation, it simpler to discuss it. Yes, that happens, and what that means is that more players will come into the game (more capital to be invested). That doesn't change the nature of the game, like more players coming to a poker cash game table doesn't change the fact that poker is a zero-sum game (excluding house commissions).
So what do the aggregate real (i.e. net of inflation) gains and losses of all poker players since 1950 years sum to?

A. zero

what do the aggregate real gains and losses of all stock traders (gross of taxes and transaction costs) sum to?

A. a 5844.180% return (http://dqydj.net/sp-500-return-calculator/) including dividends. The price gain alone is about $12 trillion in current dollars

so tell me again how both are zero sum games?
enosis_
enosis_ is offline
#98
Jan11-13, 03:44 PM
enosis_'s Avatar
P: 120
Quote Quote by Tosh5457 View Post
Russ, please use the game theory formulation, it simpler to discuss it. Yes, that happens, and what that means is that more players will come into the game (more capital to be invested). That doesn't change the nature of the game, like more players coming to a poker cash game table doesn't change the fact that poker is a zero-sum game (excluding house commissions).

You don't accept the fact that the company growing doesn't give the stockholders any direct benefit. The only benefit they'll have, in average, will be to see their stock rise in price because of others investors expectations rising. But a game just made of transactions will always be zero-sum. It doesn't even matter if the stockholders have the power to change something in the company or not, if they're not getting any of the profits companies get, they can only show a profit by selling their stock in the secondary market. And again, that's just made of transactions, it's zero-sum.
There are other possible benefits to investors including dividend disbursements, stock splits that increase the number of shares held and possibly warrants that could be exercised or sold.
Tosh5457
Tosh5457 is offline
#99
Jan11-13, 10:46 PM
P: 223
Quote Quote by BWV View Post
So what do the aggregate real (i.e. net of inflation) gains and losses of all poker players since 1950 years sum to?

A. zero

what do the aggregate real gains and losses of all stock traders (gross of taxes and transaction costs) sum to?

A. a 5844.180% return (http://dqydj.net/sp-500-return-calculator/) including dividends. The price gain alone is about $12 trillion in current dollars

so tell me again how both are zero sum games?
You're only seeing one side of the picture in the stock market case. Tell me, where did those $12 trillion come from?
BWV
BWV is offline
#100
Jan12-13, 08:31 AM
P: 328
that is beside the point - you said to use game theory jargon. The sum of the winnings is a positive number, hence its not a zero sum game
John Creighto
John Creighto is offline
#101
Jan17-13, 02:00 PM
P: 813
Quote Quote by BWV View Post
that is beside the point - you said to use game theory jargon. The sum of the winnings is a positive number, hence its not a zero sum game
This would seem to be a different issue then the topic of the original thread as it only answers if on average people in the stock market benefit. On the whole, the stock market would create wealth to the extent it improves the efficiency of production by properly allocating resources. It would destroy wealth to the extent which it either hinders the allocation of resources (by hoarding assets, diverting liquidity away from smaller players) or adds an extra administrative cost which could be better devoted to other uses.

Given that in economics these days questions are often posed in marginal terms, it might be better instead to ask: if a small change in the wealth traded on the stock market would create more wealth (How would we measure this wealth and who would benefit from it?).

Remember that the stock market is not the only way to allocate capital. People can invest through savings, through profit, they can borrow from banks, they can borrow from friends, they can borrow from the government. The stock market favors large public companies. It is an irrelevant means of acquiring capital for private companies and small companies.
BWV
BWV is offline
#102
Jan17-13, 07:34 PM
P: 328
yes, but all you would have to show is that with a purely private market for companies the cost of equity capital would be higher
Tosh5457
Tosh5457 is offline
#103
Jan17-13, 09:57 PM
P: 223
Quote Quote by BWV View Post
that is beside the point - you said to use game theory jargon. The sum of the winnings is a positive number, hence its not a zero sum game
You're ignoring the players who gave the money to those players who won money. That's like analyzing a fixed number of poker players in a table, without accounting for the new players that enter. In that case it can be a positive or negative sum game, since you're not accounting for all the players.
russ_watters
russ_watters is offline
#104
Jan17-13, 10:39 PM
Mentor
P: 21,999
Quote Quote by Tosh5457 View Post
You're ignoring the players who gave the money to those players who won money. That's like analyzing a fixed number of poker players in a table, without accounting for the new players that enter. In that case it can be a positive or negative sum game, since you're not accounting for all the players.
Count any players you want to count, Tosh, you can't make poker a positive-sum game: the sum of all of the returns is zero. The analogy was your choice. If it doesn't work, it hurts your argument, not ours.
You don't accept the fact that the company growing doesn't give the stockholders any direct benefit.
Incorrect and annoying since we've covered this already. I'm perfectly aware that there is no direct benefit besides the ownership itself. The part you don't understand is that a direct benefit isn't necessary. I've said this many times.
The only benefit they'll have, in average, will be to see their stock rise in price because of others investors expectations rising.
Right, as long as you acknowledge that those expectations aren't completely imaginary. Apple's profit projections for this year and Apple's profit projections for 1982 are a lot different from each other, for good reason.
But a game just made of transactions will always be zero-sum.
Er. Well, if you pay me $100 for a stock only worth $1 I don't think that's a zero-sum transaction. I think you argue against your point by calling this a pyramid scheme, then describing it as zero-sum. Regardless, no, the game is not just made of transactions. In between the transactions, something else happens that adds or removes value from the game.

Transaction 1: Boeing stock is trading for $100 and I buy it at $100.
Event: Boeing is awarded a $1 billion airplane contract. The market recognizes the new earnings potential of Boeing and the perceived value rises to $150.
Transaction 2: I sell my stock for $150.

Transactions 1 and 2 are zero-sum transactions; nobody won, nobody lost. The Event is the actual value of the stock changing between the two buy/sell transactions. So I gained money because the stock gained value because the company grew.

A second scenario regarding dividends:

Transaction 1: I buy a stock currently valued at $100.
Event: The company pays me a dividend of $5/share.
Transaction 2: I sell the stock for $95.

Again, transactions 1 and 2 are each zero-sum transactions. In the Event , my stock lost exactly $5 of value because the company took $5 from its bank account and gave it to me. So the stock instantly became worth $5 less.

Come to think of it, that's kinda how poker works in a casino: the house takes money out of the game.

Anyway, the only way for each transaction to be zero-sum is if there is actual value added to the company (or removed) in between, which is exactly what happens.
Anyway, I still haven't understand something. Russ, are you trying to say the stock-market isn't a zero-sum game in respect to the profits of the stockholders....
This is also annoying because I stated it explicitly in post #5. You're not absorbing anything that's being said, which implies to me you aren't interested in real discussion (much less learning), just arguing one point at a time, regardless of if they repeat. But again:

The stock market overall is positive sum with respect to the profits of the stockholders because the value of what they are trading rises. The value of each transaction is zero sum.

The value of what is being traded has to rise otherwise the transactions aren't zero sum. Let me say that again, another way:

In a pyramid scheme, each transaction is negative sum. That's why they collapse: the value of the pyramid is always negative, so if too many people try to cash-out, it collapses.

For stocks, if you pay $100 for a worthless piece of paper, that's not zero-sum. The piece of paper has to actually be worth $100 for it to be zero sum.
nitsuj
nitsuj is offline
#105
Jan18-13, 12:48 PM
P: 1,098
Quote Quote by russ_watters View Post

Transaction 1: Boeing stock is trading for $100 and I buy it at $100.
Event: Boeing is awarded a $1 billion airplane contract. The market recognizes the new earnings potential of Boeing and the perceived value rises to $150.
Transaction 2: I sell my stock for $150.

Transactions 1 and 2 are zero-sum transactions; nobody won, nobody lost. The Event is the actual value of the stock changing between the two buy/sell transactions. So I gained money because the stock gained value because the company grew.

A second scenario regarding dividends:

Transaction 1: I buy a stock currently valued at $100.
Event: The company pays me a dividend of $5/share.
Transaction 2: I sell the stock for $95.

Again, transactions 1 and 2 are each zero-sum transactions. In the Event , my stock lost exactly $5 of value because the company took $5 from its bank account and gave it to me. So the stock instantly became worth $5 less.

Come to think of it, that's kinda how poker works in a casino: the house takes money out of the game.
"So I gained money because the stock gained value because the company grew." by signing a contract? Turns out it cost Boeing two billion to fulfill the contract, what worse is the planes were negligently faulty; effect is they abruptly fall from the sky.

Who could've guessed there were risks to a company signing a contract worth a billion dollars to build one of the most complicated machines this world has that transports the most valuable assets of all. Seems the guy who bought your stock for an inflated 150 thought it was a sure bet. Lucky for them they won't be named in the lawsuits. Not too bad a deal, having no claim to the assets of the company.
nitsuj
nitsuj is offline
#106
Jan18-13, 01:11 PM
P: 1,098
Quote Quote by russ_watters View Post
Ugh, I didn't see this before: As I said to Tosh several pages ago, don't let the complexity added by multiple owners confuse you into thinking the definition of "ownership" changes. It doesn't. The stockholders own the company. So "The company owns" is still synonymous with "the stockholders own".

And incidentally, since you were non-specific and you worded it badly, the case you described was for one shareholder: You set up the company and sold the entire company to me, making me the sole owner of the bar of gold. But since I know you meant there are multiple shareholders....it is still wrong. The bylaws may or may not include direct voting on policy. If the voting is direct, all you have to do is convince 50%+1 shareholders to vote with you. If the voting is indirect, you just have to do the same except electing a representative who will do what you want.

The fact that it is cumbersome for stockholders to make major changes in large companies and doesn't happen often does not change the status of stockholders.

In any case, this was already discussed in detail and I have rehashed more than I really wanted to. For fuller treatment, read back a couple of pages.
You own the company, the company owns the gold. Think you have all the decision making power?

Why not just take a loan, secured by the gold bar. bank deposits cash to Corp'. bank account, you as sole owner feel it's your money and deposit it into your personal account and buy a home or whatever. value of gold drops.

Bank is nervous and now calls in the loan, business has no money and you decide to simply have the corporation declare bankruptcy. And you're all free and clear right?

nope, you're going to court for the money you stole. You and the corp are separate entities, oddly you just stole from something you have ownership of. Maybe that's what is confusing you, that corporations are legal entities (which would be odd since historically it's significant).

So no "The company owns" is still synonymous with "the stockholders own" is not even remotely accurate.
enosis_
enosis_ is offline
#107
Jan18-13, 05:24 PM
enosis_'s Avatar
P: 120
Quote Quote by nitsuj View Post
You own the company, the company owns the gold. Think you have all the decision making power?
Where was that claim made in the post cited?
Tosh5457
Tosh5457 is offline
#108
Jan18-13, 07:42 PM
P: 223
Russ, I'll just drop the poker analogy, but not because it's a bad analogy, it's because you never understood it since the beginning.

The part you don't understand is that a direct benefit isn't necessary. I've said this many times.
Stockholders need a benefit (i.e. be able to access the wealth of the company in any way) for holding a stock for your position to even have a chance to stand still. If there is no benefit, they're just trading pieces of paper, and that will never be anything else other than a zero-sum game. Whether the expectations of the investors are imaginary or not, independently of the reason of why they're trading, it'll always be a zero-sum game in respect to the profits. And no, more investors coming into the market doesn't change that fact as you argued before, independently of where they got the money (real economy or otherwise). That's by the way the reason I used the poker analogy, because more players coming into a poker game doesn't change its nature.

This is also annoying because I stated it explicitly in post #5. You're not absorbing anything that's being said, which implies to me you aren't interested in real discussion (much less learning), just arguing one point at a time, regardless of if they repeat. But again:
If you have to understand my motivations for arguing, I'm arguing because I think I'm right, or I wouldn't be arguing, and because many stock traders take comfort in the illusion that the stock market is positive-sum game instead of taking comfort in their skill as traders.


Register to reply

Related Discussions
Invest In Stock Market General Discussion 20
What if there was no stock market? Social Sciences 74
Is this a really secret of Stock Market? General Discussion 4
Stock market investors? Social Sciences 79
Predictable: Stock Market? General Discussion 6