Investing Catechism

Discussion in 'Stocks' started by nitro, Oct 23, 2009.

  1. nitro


    Please explain something to me. Today as an example, AMZN is up 25% because earnings obliterated analyst estimates.

    What I don't understand is, who cares from an investor point of view? Break it down for me: how does the fact that AMZN made all that money, relate into money in my own pocket as an investor? People will say, well, the company has more money, so it can acquire other companies which will lead to even more revenues, and it can buy more books, update it's computers, hire more programmers, etc etc etc. But how does any of that translate into money in my pocket if I am an investor in AMZN? Unless I share in that profit, why would I ever care? Is the value of the higher earnings only that I know you care because you are an idiot, so I will be an idiot with you and anticipate that you are going to buy the stock, and I buy the stock too, hoping to sell it to an even bigger idiot later? Is it all an illusion?

    To me, the only thing that matters as an investor is the dividend because ultimately, unless I work for AMZN, it is the only tangible way I can profit from AMZN doing well. And yet, investors bid up the stock of AMZN as if it was money they were making :confused: People say, dividends are double taxed, blah blah blah. That's why companies don't pay more dividends. Well, yeah, but it is real!

    I must be missing something.
  2. Two words:



    Traders keep forgetting that expectations is what moves a stock. When something like this comes in that impacts growth prospects up or down, the expectations change almost instantaneously.
  3. nitro


    I must not be making myself clear. Why do you as an investor care that AMZN has every single dollar in the Universe in earnings, and everyone on the planet owns AMZN, and the stock price is at 1,000,000? How does that translate into you making money unless the company pays out a dividend?
  4. Topper


    Nitro, I think I grasp what you're asking here.

    I myself am glad to see the AMZN/MSFT news for a couple reasons. Neither are because I want to own or trade them. For me, it's because I've been waiting 10 years for the Nasdaq to make a run at 5000 again, and to hear the news that a tech titan such as AMZN is essentially at a decade long double top gets me rubbing my hands together like a contestant on deal or no deal. 2nd, seeing that we're at that sticking point of 10,000, I believe we need a catalyst here.
  5. FCCT


    100% agreed.

    Think of it this way, what are the values behind owning shares in a private firm, there's no market to sell your shares, no gauranteed dividend, so the company can operate forever and never pay you a dime. Why would you want to own that?

    It makes alot more sense to lend to the company and make a higher return than bank interest.

    You could look at liquidation value or a possible buyout price.

    Here is the real kicker with these public mega caps. They are too big to ever go private. They are only "bought out" by other public firms, and usually thru more shares.
  6. FCCT


    Every turkey that tells you to buy and hold shares for the long run makes their entire living off commissions and career off of this.

    Knowingly or unknowingly financial advisers hold your hand and lead you into a fiery pit
  7. My interpretation to your question leads me to this krass answer:

    Its just one big established game that everyone is familiar with and everyone knows the rules... expectations and more profits make the value of the corporation go the stock price goes along with it....its one giant grand delusion...perhaps the same as "what is the value of a US Dollar?"

    Think of the inverse...what if we didnt have a stock else would we assign value to peoples work in the Macro sense?
  8. It all comes down to this:

    A company can do three things with earnings available to common shareholders. Either retain them to internally finance future projects (think of growth companies, small to midcap companies, etc.), the company can pay a dividend, or the company can repurchase it's own shares.

    You will need to take a finance course to learn the details of how each option affects firm and shareholder value, but all three options put money into the shareholders pocket.

    Retaining earnings to fund future projects saves the company (and therefore the shareholder) money via reduced transaction costs of having to raise additional capital at a later date.

    A dividend benefits the shareholder, no explanation needed.

    A share repurchase decreases supply which increases price. The shareholder can then sell his/her shares to put cash in their pocket.
  9. nitro


    Where is the money in my pocket from this?

    Right. This I can take to the bank, and I can buy a can a tuna with, or I can pay my car insurance with etc.

    How does this put money in my pocket? You are assuming that I own the stock. You have to convince me to buy the stock in the first place. Why would I want to unless all these earnings mean something to me in something other than the effect it may have on the stock price, and not money that I can put into a bank, like in a dividend payment?

    You see, all these reasons except the dividend case is circular reasoning. You buy the stock because you hope you can convince someone else that all this stuff matters, so it creates a big ponzy scheme. None of it means anything except in the dividend case that the company is directly subsidizing my gains. In every other case, some bigger fool subsidizes my gains through a number that is ethereal (the stock price and the number of shares I own) unless we sell it to each other to convert to $$$!
  10. nitro


    You got it!

    But I disagree with your dollar analogy. Stocks are supply markets. Commodities are demand markets. BIG difference. I can understand buying a bushel of wheat because I can take delivery of it. With a dollar, I can convert that into a loaf of bread. Supply and demand means everything in a demand market. I can eat or I starve. What do I do with a stock certificate? Wipe my ass with it?
    #10     Oct 23, 2009