Redditors are right about the unfairness of the market • Hacker News Board

Re: Redditors are right about the unfairness of the market

#211

Post by Jolter » Sat, Oct 02, 2021, 5:29 AM UTC

nradov wrote: post #28

ianai wrote: post #17

Earlier quoted context omitted.

at least consider a ban on stock buybacks like was the case until that regulation was rolled back in the 80s.

There's nothing really wrong with stock buybacks. They're just a tax efficient method for companies without strong growth opportunities to return value to shareholders.

… and what other methods of giving value to shareholders exists? Yes, pay them a dividend. Problem solved. Tax efficiency, you say, but all that means is that the state loses money. Sounds to me like the legalization of buybacks only served the shareholders, not society as a whole.

Re: Redditors are right about the unfairness of the market

#212

Post by chii » Sat, Oct 02, 2021, 7:44 AM UTC

xg15 wrote: post #204

idrios wrote: post #191

Earlier quoted context omitted.

Yes, but the difference is that a Ponzi scheme never created value in the first place and was always zero sum. If Joe's Farm sells corn and Jane's Lumberyard sells wood, you could invest in either, which they would use to expand, resulting in more corn and more lumber and therefore value was created. Meanwhile, if you invest in Jim's Useless Objects you'll end up with only more useless objects that have no real value…

How exactly do you define "creating value"? > resulting in more corn and more lumber and therefore value was created. > Maybe they sell to others who disagree and believe that there is still value to be created in the future. The first paragraph implies "value" is an objective quantity while the second one implies "value" is subjective to a particular investor. Both can't be true at the same time. We can all have dif…

> value to be created in the future

this is the subjective, aka, speculative value.

> resulting in more corn and more lumber

this is the objective value - it's already realized (aka, this is the profits the company have made).

> Both can't be true at the same time.

They are different things, and certainly can be true at the same time.

> The problem is that we need someone to have incorrect believes so we can sell to them

no, we need someone who would speculate that the future value would be higher than today's value, but it's not a ponzi scheme because the company is constantly creating value (as it's profitable currently).

Ponzi scheme requires that there's no underlying value being generated, and that all current profits paid out from new investors.

Re: Redditors are right about the unfairness of the market

#213

Post by chii » Sat, Oct 02, 2021, 7:49 AM UTC

tablespoon wrote: post #175

JohnPrine wrote: post #163

Earlier quoted context omitted.

I don't quite understand. Suppose a company has a bank account with $1000. I own shares equating to 25% of the company, worth $250. The company has a good quarter and the bank account grows to $2000, but it doesn't pay a dividend. How should the growth of the bank account affect the price of my shares? Under the model of stock pricing you described, the price wouldn't increase and it would take a fool to buy them fro…

What's the of value owning a bank account you can't take a withdrawal from? Just now, with this comment, I've started a "bank" and I'm granting you. JohnPrine, an account with a balance of $1,000,000. However, the terms are you can never, ever withdraw or transfer that money under any circumstance. How much does this new account add to your net worth?

> you can't take a withdrawal from?

you could, but other shareholders might not want it withdrawn. So you have to argue and hash it out with other shareholders.

So the currency being held by the company is not worth exactly the same as currency held in your own bank account (of which you have full control over).

But it doesn't mean those currency is worthless.

Re: Redditors are right about the unfairness of the market

#214

Post by chii » Sat, Oct 02, 2021, 7:52 AM UTC

xg15 wrote: post #208

JohnPrine wrote: post #189

Earlier quoted context omitted.

The difference is that these companies actually have real assets, and holding stock legally grants you fractional ownership over them. Your hypothetical is more like an Enron situation where shareholders are told that there are assets behind their stock that really don't exist. That's why the stock price plunged when the fraud was revealed, and why my net worth doesn't budge when you grant me the account. As a though…

Genuine questions, what does legal fractional ownership entitle you to do?

it entitles you to sell that legal fractional ownership to someone else.

If your fraction is high enough, you could have full legal control. But since it's very dispersed, there would be a discount on the value of that legal ownership.

But the fact that you still own it is worth something, and that is exactly what the share price is indicating.

Re: Redditors are right about the unfairness of the market

#215

Post by chii » Sat, Oct 02, 2021, 7:55 AM UTC

tablespoon wrote: post #198

JohnPrine wrote: post #190

Earlier quoted context omitted.

If you granted me ownership of the account and then denied me access, I could take you to court. Stock ownership is a legal agreement. If the leadership of the corporation doesn't act in the shareholders' best interest, they'll be replaced with someone who does. Stock markets have worked for 400 years. Don't you think that makes it less likely that they're ponzi schemes?

> If you granted me ownership of the account and then denied me access, I could take you to court. Stock ownership is a legal agreement. Legal agreements can take many forms, and the legal agreement for the account says no withdrawals ever. When you have ownership of a share of stock, you're also denied access to the underlying assets. If you buy one share of Microsoft, can you take them to court to demand access to…

> demand access to that share's worth of assets?

if you owed me some money, can i chop up a part of your kidney to sell?

the ridiculous notion that you are entitled to use or own an asset directly partially just because you own the shares partially is a misunderstanding of the legal structure of share ownership.

You do not own any assets of the underlying company of the shares you hold. You merely own the company itself.

It's like trying to claim a piece of america (or your country) because you are a citizen of that country.

Re: Redditors are right about the unfairness of the market

#216

Post by [deleted] » Sat, Oct 02, 2021, 8:11 AM UTC

jfengel wrote: post #186

bsd44 wrote: post #181

Earlier quoted context omitted.

"One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not." So when you make money in the stock market, where does the money come from?

From the company's profits. When you buy a company, you own a piece of it. The price of a stock theoretically reflects how much profit you expect the company to earn. In a simple scenario, the company keeps all of its profits in a bank somewhere. The company's value then goes up because you own a share of that money. You'd expect the price to go up to reflect that increased value. You would sell it at a higher price,…

[deleted]

Re: Redditors are right about the unfairness of the market

#217

Post by jjav » Sat, Oct 02, 2021, 8:20 AM UTC

tablespoon wrote: post #175

JohnPrine wrote: post #163

Earlier quoted context omitted.

I don't quite understand. Suppose a company has a bank account with $1000. I own shares equating to 25% of the company, worth $250. The company has a good quarter and the bank account grows to $2000, but it doesn't pay a dividend. How should the growth of the bank account affect the price of my shares? Under the model of stock pricing you described, the price wouldn't increase and it would take a fool to buy them fro…

What's the of value owning a bank account you can't take a withdrawal from? Just now, with this comment, I've started a "bank" and I'm granting you. JohnPrine, an account with a balance of $1,000,000. However, the terms are you can never, ever withdraw or transfer that money under any circumstance. How much does this new account add to your net worth?

> Just now, with this comment, I've started a "bank" and I'm granting you. JohnPrine, an account with a balance of $1,000,000. However, the terms are you can never, ever withdraw or transfer that money under any circumstance. How much does this new account add to your net worth?

But tragically, the IRS will tax JohnPrine on that "income" of $1M he can never get his hands on.

Re: Redditors are right about the unfairness of the market

#218

Post by bsd44 » Sat, Oct 02, 2021, 8:29 AM UTC

jfengel wrote: post #186

bsd44 wrote: post #181

Earlier quoted context omitted.

"One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not." So when you make money in the stock market, where does the money come from?

From the company's profits. When you buy a company, you own a piece of it. The price of a stock theoretically reflects how much profit you expect the company to earn. In a simple scenario, the company keeps all of its profits in a bank somewhere. The company's value then goes up because you own a share of that money. You'd expect the price to go up to reflect that increased value. You would sell it at a higher price,…

Yes you are right, I confused shares with other financial instruments.

Re: Redditors are right about the unfairness of the market

#219

Post by bsd44 » Sat, Oct 02, 2021, 8:30 AM UTC

bern4444 wrote: post #195

bsd44 wrote: post #181

Earlier quoted context omitted.

"One of the biggest misconceptions is that the stock market is a zero sum game. Its absolutely not." So when you make money in the stock market, where does the money come from?

The same place that money goes when you lose money in the market :) [0] More seriously I think the key lots of people miss is that when you buy shares of a company, you don't have dollars anymore. You have shares. Shares are a currency controlled by the company that can issue them (just as the govt can issue dollars). Shares are assets just like a dollar. Also like a dollar, those assets can appreciate or depreciate…

You are correct, thanks for replying.

Re: Redditors are right about the unfairness of the market

#220

Post by chii » Sat, Oct 02, 2021, 8:31 AM UTC

setr wrote: post #202

JohnPrine wrote: post #167

Earlier quoted context omitted.

Stocks represent ownership in a company. Apple has $200 billion in cash currently. Owning a share of Apple quite literally means that you own a share of that $200 billion. It's useful to think about this in terms of a company's tangible assets because it provides a lower bound on the price of a share (assuming the company has no debt). If the Apple share price ever dropped so low that the sum of all the shares was wo…

The part I don't understand is how do I translate "ownership in apple" to USD. Obviously I can trade it to someone else, but that's just moving the problem -- eventually someone has to be in the position to actually extract real value out of the stock, in a fashion that correlates to company success. AFAIK dividends aren't an inherit property to a stock (it's a "class" of stock) so that's not fully satisfactory, and…

> eventually someone has to be in the position to actually extract real value out of the stock

what is "real" value?

If it's cash, then you can either sell the stock itself, to somebody else, which can repeat infinitely as long as the company is a going concern. There's no end - because there's no end to the profits of a company that continue to produce profits.

Of course, it might end one day, but it would be the last bag holder who purchased a dying company (imagine if apple became what IBM is today). But that's got nothing to do with the structure and ownership of stocks, but that the company's performance declined.