02-23-2022, 09:48 AM
The market reflects fundamentals to an extent, but still not for the reasons it shou
<!-- SC_OFF --><div class="md"><p>I'm making this post in hopes of being enlightened with something I'm missing, so feel free to disagree.</p> <p>I believe that the stock market is, short term, based on about 40% Fundamentals and 60% on Technical Analysis and other time-the-market predictions. I believe that the stock market is, long term, MOSTLY based on Fundamentals. However, I think that in both the short and long-term, stock prices should NOT reflect Fundamentals this much. </p> <p>The main concept that I am basing my opinion on is the idea that you will get money back on your investment, and that amount of money is equal to how much equity you have in a company. This is a sham idea, or at least not as good as people make it out to be. Another equally sham idea is the concept of "future earnings". You think you will get your future earnings in the future. When? In the future. How far in the future? Whenever the company pays dividends, but you will get ONLY A PORTION of those "future earnings". But what if the company doesn't pay dividends, when will I get my future earnings then? Whenever the company is liquidated. When will that happen? Potentially never because lots of companies live a long time. Think of General Electric, which went public like 120 or so years ago. If you bought shares in GE at the IPO and GE never paid dividends, you would be dead before you'd get your precious "future earnings". I know that GE broke up once or something so I'm just estimating the amount of years it's been public. Either way, it's a damn long time and they'll be around for likely another 120 years too. </p> <p>The only reason anyone should give a shit about how a company is performing is if the following "events" occur. These events I will now list are the Fundamentals that I believe are CORRECTLY changing the prices of stocks. They are not related to future earnings (except for dividends, which really aren't the same as the aforementioned 240 year long wait for earnings), but instead are specific events that have an immediate effect on the stock price, events that affect the price due to anticipation of such events, or both. I have likely missed some (or many) things, as these are events that I am giving rigorously specific definitions. If I forgot to mention some other event, or if there are missing pieces related to any listed event, I would prefer if you would not criticize me on this, unless you actually have something else to say that's relevant to the main idea of this post.</p> <p>All of the events I will mention thus are based on fundamentals and not technical analysis.</p> <p>All of these events may cause the price to rise or fall due to anticipation of the event as well, but I will not mention this phenomenon for most of these events' descriptions(but I will for some) because it is implied that anticipation has an effect. Therefore, most of these will be about the affect on the price, positive or negative, AFTER the event occurs.</p> <p>(positive) Share buybacks</p> <p>--> This has a mathematical effect on the price: it lowers the amount of shares outstanding, which logically raises the price of current outstanding shares.</p> <p>(negative) New share issuances</p> <p>--> This has a mathematical effect on the price, the opposite of share buybacks</p> <p>(negative) Good employee performance</p> <p>--> What I mean by this being negative is that when certain employees(usually management) perform well, they are many times rewarded with more stock, which is always a new issue, technically causing the price to go down(even if it's just a little). So we ignore all the other implications of the idea of "good employee performance", but rather only focus on this one aspect of new share issuing.</p> <p>(positive) Stock split</p> <p>--> After a stock split, there is increased liquidity because more people can afford the stock(ex. Google).</p> <p>(positive) Having a dividend</p> <p>--> People will see that a stock pays a dividend and will want to buy it.</p> <p>(positive) Raising dividend</p> <p>--> After they raise the dividend, more people will decide that the stock is now worth their purchase, causing them to buy.</p> <p>(negative) Lowering dividend</p> <p>--> After they lower their dividend, people who currently own shares will decide that the stock is no longer worth it, and will thus sell.</p> <p>(positive) Ability to get more voting power</p> <p>--> Some wealthier businesspeople will buy because they want more voting power either due to (1) their ego; (2) they want to get onto management or board of directors so they get a salary; or (3) they think they can make the company do better in order to cause some of the other events listed in this post to happen, which will make their shares increase in value.</p> <p>(positive) News that the company is getting bought out</p> <p>--> Buying company will buy shares from people at extremely high price once deal goes through</p> <p>(positive) A corporate raider like Carl Icahn is coming to strip the company of its assets</p> <p>--> The corporate raider might make the company pay out dividends/more dividends.</p> <p>[These next 3 events are solely based on anticipation of the other events happening]</p> <p>(positive and negative) Any other good news that means the company now has more money/potential to gain more money</p> <p>--> (+)This means the company might in the future buyback more shares, start paying dividends, or raise current dividends.</p> <p>--> (-)This means the company might reward employees more, causing the price to go down.</p> <p>(negative) Any bad news that means the company now has less money or potential to lose more money</p> <p>--> This means the company might issue more shares, lower dividends, or go bankrupt.</p> <p>(negative) Bankruptcy</p> <p>--> Obvious</p> <p>I believe that currently, Fundamentals are based 90% on the ideas of company performance, and only 10% on this giant list of other Fundamental events.</p> <p>So why are people "valuing" companies based on these concepts of "future earnings" and "liquidation equity" if you won't get paid till you have great-great-grandchildren? Why does this type of valuation win in the long run? Any success of Technical Analysis makes more sense at this point. My best guess is that it's because it's just always been like that, and people don't want to stop doing something that works. I have no idea when or why people started valuing companies based on money they MIGHT get in the future. But I think that it doesn't matter because I personally would rather live in a world where I can base my purchases on future earnings, since future earnings reflect company performance and furthermore because company performance is easier to predict than predicting when the company will buyback shares or whatever. I prefer this over a world where prices are based only on my giant list and technical analysis.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/nolawnchayre"> /u/nolawnchayre </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/syttz6/the_market_reflects_fundamentals_to_an_extent_but/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/syttz6/the_market_reflects_fundamentals_to_an_extent_but/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>I'm making this post in hopes of being enlightened with something I'm missing, so feel free to disagree.</p> <p>I believe that the stock market is, short term, based on about 40% Fundamentals and 60% on Technical Analysis and other time-the-market predictions. I believe that the stock market is, long term, MOSTLY based on Fundamentals. However, I think that in both the short and long-term, stock prices should NOT reflect Fundamentals this much. </p> <p>The main concept that I am basing my opinion on is the idea that you will get money back on your investment, and that amount of money is equal to how much equity you have in a company. This is a sham idea, or at least not as good as people make it out to be. Another equally sham idea is the concept of "future earnings". You think you will get your future earnings in the future. When? In the future. How far in the future? Whenever the company pays dividends, but you will get ONLY A PORTION of those "future earnings". But what if the company doesn't pay dividends, when will I get my future earnings then? Whenever the company is liquidated. When will that happen? Potentially never because lots of companies live a long time. Think of General Electric, which went public like 120 or so years ago. If you bought shares in GE at the IPO and GE never paid dividends, you would be dead before you'd get your precious "future earnings". I know that GE broke up once or something so I'm just estimating the amount of years it's been public. Either way, it's a damn long time and they'll be around for likely another 120 years too. </p> <p>The only reason anyone should give a shit about how a company is performing is if the following "events" occur. These events I will now list are the Fundamentals that I believe are CORRECTLY changing the prices of stocks. They are not related to future earnings (except for dividends, which really aren't the same as the aforementioned 240 year long wait for earnings), but instead are specific events that have an immediate effect on the stock price, events that affect the price due to anticipation of such events, or both. I have likely missed some (or many) things, as these are events that I am giving rigorously specific definitions. If I forgot to mention some other event, or if there are missing pieces related to any listed event, I would prefer if you would not criticize me on this, unless you actually have something else to say that's relevant to the main idea of this post.</p> <p>All of the events I will mention thus are based on fundamentals and not technical analysis.</p> <p>All of these events may cause the price to rise or fall due to anticipation of the event as well, but I will not mention this phenomenon for most of these events' descriptions(but I will for some) because it is implied that anticipation has an effect. Therefore, most of these will be about the affect on the price, positive or negative, AFTER the event occurs.</p> <p>(positive) Share buybacks</p> <p>--> This has a mathematical effect on the price: it lowers the amount of shares outstanding, which logically raises the price of current outstanding shares.</p> <p>(negative) New share issuances</p> <p>--> This has a mathematical effect on the price, the opposite of share buybacks</p> <p>(negative) Good employee performance</p> <p>--> What I mean by this being negative is that when certain employees(usually management) perform well, they are many times rewarded with more stock, which is always a new issue, technically causing the price to go down(even if it's just a little). So we ignore all the other implications of the idea of "good employee performance", but rather only focus on this one aspect of new share issuing.</p> <p>(positive) Stock split</p> <p>--> After a stock split, there is increased liquidity because more people can afford the stock(ex. Google).</p> <p>(positive) Having a dividend</p> <p>--> People will see that a stock pays a dividend and will want to buy it.</p> <p>(positive) Raising dividend</p> <p>--> After they raise the dividend, more people will decide that the stock is now worth their purchase, causing them to buy.</p> <p>(negative) Lowering dividend</p> <p>--> After they lower their dividend, people who currently own shares will decide that the stock is no longer worth it, and will thus sell.</p> <p>(positive) Ability to get more voting power</p> <p>--> Some wealthier businesspeople will buy because they want more voting power either due to (1) their ego; (2) they want to get onto management or board of directors so they get a salary; or (3) they think they can make the company do better in order to cause some of the other events listed in this post to happen, which will make their shares increase in value.</p> <p>(positive) News that the company is getting bought out</p> <p>--> Buying company will buy shares from people at extremely high price once deal goes through</p> <p>(positive) A corporate raider like Carl Icahn is coming to strip the company of its assets</p> <p>--> The corporate raider might make the company pay out dividends/more dividends.</p> <p>[These next 3 events are solely based on anticipation of the other events happening]</p> <p>(positive and negative) Any other good news that means the company now has more money/potential to gain more money</p> <p>--> (+)This means the company might in the future buyback more shares, start paying dividends, or raise current dividends.</p> <p>--> (-)This means the company might reward employees more, causing the price to go down.</p> <p>(negative) Any bad news that means the company now has less money or potential to lose more money</p> <p>--> This means the company might issue more shares, lower dividends, or go bankrupt.</p> <p>(negative) Bankruptcy</p> <p>--> Obvious</p> <p>I believe that currently, Fundamentals are based 90% on the ideas of company performance, and only 10% on this giant list of other Fundamental events.</p> <p>So why are people "valuing" companies based on these concepts of "future earnings" and "liquidation equity" if you won't get paid till you have great-great-grandchildren? Why does this type of valuation win in the long run? Any success of Technical Analysis makes more sense at this point. My best guess is that it's because it's just always been like that, and people don't want to stop doing something that works. I have no idea when or why people started valuing companies based on money they MIGHT get in the future. But I think that it doesn't matter because I personally would rather live in a world where I can base my purchases on future earnings, since future earnings reflect company performance and furthermore because company performance is easier to predict than predicting when the company will buyback shares or whatever. I prefer this over a world where prices are based only on my giant list and technical analysis.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/nolawnchayre"> /u/nolawnchayre </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/syttz6/the_market_reflects_fundamentals_to_an_extent_but/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/syttz6/the_market_reflects_fundamentals_to_an_extent_but/">[comments]</a></span>Kind Regards R