> that over-promotes stocks as an investment vehicle.
But what else is there? Holding cash is terrible because it even loses value and the real estate market feels grossly over-expensive. So if you earn more than you spend, where do you put your extra money? I don't think that bonds, p2p-lending or precious metals perform better in risk/reward.
"But what else is there? Holding cash is terrible ..."
Holding cash might be terrible. Certainly the returns are and it makes sense that (the entire world) would be chasing higher yields elsewhere.
However, if those assets take a 50% haircut at some point in the near future, holding cash will have looked like a fantastic idea.
Given the current Schiller P/E of 26 (!) that was mentioned elsewhere in this discussion, a 50% haircut in US equities is not at all outlandish to consider.
That's my point. Stocks outperforming cash, bonds, and precious metals isn't some universal truth. It's a product of Fed/USG policy (and other factors).
Stocks represent ownership of business producing goods and services and selling them for profit. Cash, bonds, and precious metals are just an accounting mechanism. The value is created by business. So it pretty much is universal truth.
If stock prices represent anything concrete, how is it that Snapchat's market cap is higher than Ford's?
Do any of us actually believe that Snap's stock price is reflective of its value to society?
Today, stock prices are all about perception and company image. Most shares are non-voting, and don't pay dividends. And you can't take your stock and march to a company headquarters to demand that they give you something of value in exchange.
To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector.
> If stock prices represent anything concrete, how is it that Snapchat's market cap is higher than Ford's?
> Do any of us actually believe that Snap's stock price is reflective of its value to society?
of course not. the stock price doesn't represent the value to society; it represents the (perceived) value to investors, taking into account potential for growth. ford is an established, stable company, but it's hard to see any avenues for massive growth over the next decade. I don't personally believe snapchat will grow massively, but it's more likely than ford to do that or get purchased for a huge amount of money by a tech giant.
If you re-read the last sentence of the GP's comment ("To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector"), I think that you're strengthening their position rather than disagreeing with them.
In context, the GGP is positing that stocks should have a higher rate of return than other modes of investment because, to paraphrase, "companies create value". The point of the GP is that perceived value to investors drives the stock price more than value to society, thus countering the notion that stocks are inherently "better".
first of all, whether or not a company "creates value for society" is a red herring. it doesn't matter to an individual looking for an investment vehicle.
> To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector
this is true to the extent that thinking of stocks this way probably wouldn't hurt you as a small investor, but it obscures the reason why stocks have value and are different from bonds. when you buy a stock, you are locking in a fraction of future real productivity, whether or not you can derive cashflow from it directly. with a bond, you are locking in a nominal return, which could result in a real loss over time. although stocks have significantly outperformed bonds historically, I would hesitate to say that one is inherently better than the other; they just carry different risks.
as an aside, I'm really not sure why non-voting shares that don't pay dividends are valuable, but AFAIK, these are not as common as nrclark suggests.
Treating stocks as fractions of future real productivity ignores why companies sell shares in the first place. If the value of a company was wholly in its future real productivity, then companies would never part with ownership. However, companies do sell shares because they need liquidity now, whereas the future value of the company is purely speculative. Shares are but one of many alternatives for companies to raise liquidity. These alternatives provide opportunities to investors with different risk/reward profiles. As you say, there's nothing special about stocks that makes them inherently superior to other forms of investment.
> Most shares are non-voting, and don't pay dividends.
80% of S&P 500 companies pay a dividend [0] and non-voting shares are actually very rare. In fact, Snap even wrote in its IPO paperwork that "to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange" [1].
Ford's value is low because they pay out 8% dividend yield every yea. This has hurt their growth because other companies are reinvesting that money. Additionally dividends are objectively worse than buybacks because of the tax implications.
Stocks represent ownership and shareholder rights, which extend beyond voting rights.
Equities are a piece of creative energy applied to capital.
I am not saying you can’t lose money with wallstreetbets or that you can’t make a business of cash. But a creative business around money transmission and risk management is equities not cash itself.
Bonds are not just an accounting mechanism; bonds are an alternative to stocks for investment. Even government bonds create value---if not funding something tangible (such as infrastructure), just the existence of a stable and functioning legal system is hugely valuable.
Cash is more than an accounting system too, especially since the end of the gold standard. There isn't a fixed supply of dollars that businesses just move around.
Also, with regards to both cash and precious metals: their value is as media for economic transactions; their value increases each time they change hands. Would you want to barter to buy shares of a company? Trade sheep to invest in Microsoft?
I didn’t say bonds and cash can’t be investments, just that they don’t generate new goods and services. Cash and cash equivalents only generate value through passage of time. There isn’t any creativity involved. Creativity is long term more valuable than just the time value of money.
That same reductionist argument can also be applied to stocks. Share ownership doesn't generate value in and of itself either.
You're saying that businesses generate value. No disagreement from me there.
But then you're saying that stocks are the only way to share the value that businesses create. That's where you lose me. Selling shares is not the only way for a company to raise funds to operate. Companies can also sell bonds or take out loans (i.e. cash). Your argument that stocks are inherently more valuable would only make sense if stocks were the only way to invest in a company.
Without share ownership, there is no business... you can have a business without loans. business generates value. Shares assign ownership. Loans just price risk of capital. Pricing the risk is also a business.
Bonds are very similar to equity. I've just recently realized this.
Companies get funding from two sources, equity and debt. The sum of those are equal to assets in the balance sheet. Both represent different forms of ownership of the company. Equity holders decide how the company is managed, debt holders have priority in income distribution and in liquidation.
Someone already owns a company before company sells (issues / dilutes) shares. That ownership is just shares. No shares need to ever be sold for them to exist. Founders create shares out of nothing when they create a business.
With that line of reasoning you're countering your original point.
If companies don't sell shares, then there's no stock market. If there's no stock market, then there's no rate of return for stocks. If there's no rate of return for stocks, then stocks aren't an inherently superior investment to bonds, cash, or goods.
If someone founds a company that's 100% owned by that one person, then you (as an outside investor) aren't partaking in any of the value that that business creates. Let's say you want part of the ownership of that company. Companies don't just give out shares of ownership because they feel like it. Companies give out shares because they need liquidity. They can exchange fractional ownership for liquidity directly (e.g. selling shares) or indirectly (e.g. giving employees stock options instead of salary). However, shares are not the only way for companies to gain liquidity.
Ownership that is not traded has no value to investors. Ownership that is traded is traded for a reason, and must be compared to alternatives. Those alternatives are not inherently less valuable than shares.
You don’t need a stock market for equity to appreciate. A private business that delivers value makes owning a piece of the business valuable regardless of whether the shares are publicly traded
But what else is there? Holding cash is terrible because it even loses value and the real estate market feels grossly over-expensive. So if you earn more than you spend, where do you put your extra money? I don't think that bonds, p2p-lending or precious metals perform better in risk/reward.