I can answer your question in one word.
Inflation.
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Stocks Should Go to Zero
- Thread starter Lucias
- Start date
I can answer your question in one word.
Inflation.
Over the long run, equity markets cannot grow faster than the overall economy.
So, in essense, yes, the original point is a decent formulation of reality.
Repeat for "house as investment" and gold and myriad other things.
"Trees don't grow to the sky".
So, in essense, yes, the original point is a decent formulation of reality.
Repeat for "house as investment" and gold and myriad other things.
"Trees don't grow to the sky".
Lots of short answers by lots of people who haven't given it as much thought as the original poster. Kudos for trying to figure this out.
OP, if you believe that the stock market represents the values of companies and/or their profitability then your conclusion is reasonable. The fact that there is not a real correlation means that the premise is false. The stock market is not based on the value or profitability of companies. The stock price is not determined by the company, either, although their decisions can impact it slightly.
Once the stocks are written and sold by the company at the price the company decides (number of shares divided by the market value of the company, just as you said), the stocks then become disconnected from the company; or only connected loosely.
Once the stock and the price are disconnected from the company, the rules of sales apply. Price, then, is the temporary agreement between two parties. And as long as there is a willing buyer and a willing seller coming to agreement in a moment of time, there will always be a price. No bid = no price. No ask = no price. The stocks are like that. It's a thing people are buying and selling. The price changes independent of the company. News of the company's decisions can create more willing buyers and less willing sellers, driving the price up. But the company itself, their books, their profitability, cannot have a direct impact on the stock price anymore.
OP, if you believe that the stock market represents the values of companies and/or their profitability then your conclusion is reasonable. The fact that there is not a real correlation means that the premise is false. The stock market is not based on the value or profitability of companies. The stock price is not determined by the company, either, although their decisions can impact it slightly.
Once the stocks are written and sold by the company at the price the company decides (number of shares divided by the market value of the company, just as you said), the stocks then become disconnected from the company; or only connected loosely.
Once the stock and the price are disconnected from the company, the rules of sales apply. Price, then, is the temporary agreement between two parties. And as long as there is a willing buyer and a willing seller coming to agreement in a moment of time, there will always be a price. No bid = no price. No ask = no price. The stocks are like that. It's a thing people are buying and selling. The price changes independent of the company. News of the company's decisions can create more willing buyers and less willing sellers, driving the price up. But the company itself, their books, their profitability, cannot have a direct impact on the stock price anymore.
Quote from Lucias:
In economics class, if I remember, that the long term profit rate of a company should be zero. I mean that in an efficient market that a company should not be able to make a profit beyond paying its employees and covering its cost -- if I remember.
Economics: the dismal science that seeks to explain observed behavior by first appealing to transcendental premises.
Quote from Lucias:
In economics class, if I remember, that the long term profit rate of a company should be zero. I mean that in an efficient market that a company should not be able to make a profit beyond paying its employees and covering its cost -- if I remember.
If this is true then wouldn't that imply that the long term return for a company should essentially be zero or the no more then the value of the physical resources. One can see this, for example, when a second mover product comes out and increases competition, i.e in the tablet space, game consoles, etc.
How does one reconcile this idea that the long term return for company should be zero with the idea that the stock market should always keep growing, i.e stocks for the long run?
Thoughts?
Someone has already mentioned inflation and imperfect competition. They are both correct. I'll just add this: No one will take entrepreneurial risk for free, so there will always be equity risk premium, which currently is smaller due to the dried up of credit supply.
By the way, even under perfect competition, profit margin will always be more than zero. No one will work for nothing. When the profit margin gets smaller, people who originally cannot afford such products can start buying them. Plus, those who originally can afford, can buy more; hence making up for the shrinking profit margin.
Ultimately everyone can afford those products. That is the beauty of capitalism. There will be a time when people won't simply buy more. What's the use of having 100 tvs? By then, the original entrepreneur would have moved on to something new. The products, at that time, become ubiquitous, and so will be regarded as low-end products. The profit margin has become so small it'll only make financial sense when the production is shifted to poorer countries.
Unless all the sheeople and CEO's take their money out of the market, unless all hedgefunds et all dump their holdings.....The US Stock Market will not nor will many individual stocks go to zero.
With that said, DOW at 5000 is very likely with 9000, and 6000 triggering a massive out flow.
Gov may be able to prop the market up for another few years...but in the end...like everything...nature will take its course. And the laws of nature dictate all....the market will find it's equilibrium....at levels far below the current.
With that said, DOW at 5000 is very likely with 9000, and 6000 triggering a massive out flow.
Gov may be able to prop the market up for another few years...but in the end...like everything...nature will take its course. And the laws of nature dictate all....the market will find it's equilibrium....at levels far below the current.