Your Stocks are Worthless

This essay will argue that stocks have evolved into a kind of currency, and that stocks that pay no dividends (and are unlikely ever to pay dividends) are nearly worthless.

Point 1: Stocks are valued by group psychology more than levelheaded financial thinking.

Point 2: This valuation by collective agreement makes stocks no different from currency: people value it because everyone else values it.

Point 3: Stocks aren’t currency. Sooner or later people will realize this. Stocks should be valued strictly as financial assets: if they don’t pay, they’re worthless.

Point 4: By this method of valuation, most stocks today are worthless. Evidence: instability of the market, massive sell-offs based on group fear. MSFT: 52 – even though it has never paid dividends – has 30 billion in cash and no intention of paying to shareholders. If the stocks were intrinsically valuable financial assets – like bonds – people would be comfortable holding their stocks indefinitely, no matter what the market was doing.

Point 5: Idea of currency versus valuable assets – valuable assets you don’t sell, because their value to you is more than what you’d get in selling them. Is that true of any stocks today? Stock prices should hug this line: i.e. the price should always be close to the value that people would assign “if everyone else thought it was worthless.”

Point 6: What the market should really react like. People should buy stocks only if they think they will get a good dividend return with better risk/reward than bonds or other assets.

This system of valuation (let’s call it the Byron method, until I find out the real name – I’m sure there is one) doesn’t preclude speculative investment: if a company is likely to be successful, it will pay dividends in the future, so it is worth something now.

Essay: Rewrite later… bedtime.

It occurred to me when I was resting in dome a few months ago, that most stocks are basically worthless pieces of paper (or more often, little bits of magnetic polarization lying on a hard drive thousands of miles away.)

People pay large sums for stocks because everyone else thinks they’re worth it. Why are there so many different ways of valuing a stock? Because these methods all take into account what other people think the stock is worth. The key point here: what other people think.

Imagine if everyone in the world thought all stocks were worthless. Would some stocks be worth buying? Sure, the ones that pay dividends, or that are likely to pay dividends in the near future. This is how stocks should really be valued. People should ask, “If everyone else thought this was worthless, what would I pay for it?”