It's worth considering that what you are buying is a dividend stream and/or the possibility of a company being bought, which simply gives you more stock. When you essentially lend money to GOOGL or AMZN, what are you actually getting back besides a story?
Don't get me wrong, in the timespan of an individual's life it may well make sense to heavily buy into this system. I'm just making the point that it's current form is rather new and appears loosely connected to the real world and is subject to change.
To me, the current stock market seems like a fiat currency without the threat of physical force. Maybe the temptation will be to increasingly merge government with large companies in order to keep the plates spinning.
> When you essentially lend money to GOOGL or AMZN, what are you actually getting back besides a story
Buying a stock is not lending money to a company. It's purchasing an ownership claim on future earnings realized by the company.
For AMZN, the expectation of its investors is that it should not realize substantial (relative to revenue) earnings now so that it can grow further and thereby increase the long-tail earnings to which shareholders are entitled.
GOOG, on the other hand, is returning money to shareholders now. In fact, they just authorized a program to return another $50B to shareholders. Our tax regime skews payout preferences, so that instead of paying dividends, some companies opt for share buybacks. But the net result is that cash is transferred from the company to its shareholders. You can see GOOGL's buybacks over time here, looks like they returned ~$31 billion to shareholders in 2020: https://ycharts.com/companies/GOOG/stock_buyback .
> can be realized via dividends or the sale of the company.
Keep reading my comment. Share buybacks are another way of returning cash to shareholders.
> involving the general public in stock ownership is a new thing, it really is new ground to cover.
There have been discount brokerages for 50 years now. I guess that's "new" as compared to how long there has been money, but I don't know that it's "new" in the sense that we can't determine whether buybacks do have the effect of returning cash to shareholders (they do). Share buybacks have been allowed since 1934.
Or can be realized in a share buyback program, which are massive. Dividends and buybacks are just slightly differently structured ways to return profit to investors.
> Keep in mind that tax law highly incentivizes the avoidance of dividends.
Combining Biden's capital gains tax, Federal estate tax, Biden's stepped up basis for estates, Washington state's estate tax, and Washington state's new capital gains tax, the top estate tax rate is now 70%.
This ensures that tax planning will dominate investment strategies, which usually results in suboptimal investing and subsequently a lower performing economy.
Changes depend on time. Biden is past the early magic 100 days and now members of the house (and 1/3rd the senate) are realizing that they need to prepare for their re-election campaign in less than a year. The longer things go on the more concerned they will be.
The democrats have the government today. The most democrat heavy handed set of bills will ensure that republicans take a veto-proof majority of both houses. Different levels of watered down will have different effects. There is a reasonable chance that no matter what they do they will lose the house next election (even passing bills that the republicans would like to author but wouldn't dare!), but the exact set of laws they pass will have a big effect on both who shows up, and how voters change their votes.
Total shares outstanding plus outstanding stock awards:
Dec 2011 : 468 million
Dec 2012 : 470 million
Dec 2013 : 476 million
Dec 2014 : 483 million
Dec 2015 : 490 million
Dec 2016 : 497 million
Dec 2017 : 504 million
Dec 2018 : 507 million
Dec 2019 : 512 million
Dec 2020 : 518 million
I'm not sure about Amazon in particular, but generally companies (especially tech companies) hold some percentage of stock in reserve for employee compensation. However, the company can also buy back stock on the open market either to take it out of circulation (and thus increase the value of outstanding shares) or use it for employee compensation. Finally, if the board (as a proxy for individual owners) permits it, a company can issue new shares for any purpose including selling to raise cash for operations, or giving to employees as compensation. This isn't free money, however. New shares tend to dilute the value of existing shares. So owners often prefer to raise money other ways, like debt that doesn't convert to an ownership claim in the way stock does.
Just because a company isn't distributing dividends doesn't mean you're only buying a story. AMZN still has lots of room to grow. If I'm an investor in AMZN I would much rather them reinvest profits into a data center that will produce even more future profits than distribute the money to me. Once these growth companies top out in terms of their market share they'll pivot to distributing dividends, same as large established companies like Coca Cola
Personally, I'm not smart enough to pick individual stocks.
At some point (perhaps now) Amazon growth is predicated on cannibalizing other companies. After all, the broad market can't exceed the GDP generally for the long term.
My primary point here is not to argue about investment concepts, merely to state a concern about the artificiality of it all. Financialization is real and rather spooky.
The thing is there's a FRACTION of a percentage of people who are "good at picking stocks".
Most PROFESSIONAL stock pickers don't beat the market. And those that do, a tiny fraction can do it consistently over a 5-10 year time frame.
This is backed up by decades of data. But we still have millions of people who apparently think they are smarter than the thousands of professional stock-pickers who have MAs, PhDs and years of experience and do it full-time and still don't beat the market.
And sure, many average joes were wildly successful with GME or whatever the latest meme stock is. Just as many people made a ton of money in the last tech bubble. Check back in 5-10 years...
I agree with this, picking individual stocks is effectively a full time job. Most people looking for a moonshot only want to invest based on a "theme". E.g. you bet on the entire EV market.
Exactly. Just like if you get 1000 people in a room, odds are one of them will get a coin toss right 10 times in a row. Doesn't mean that guy is good at predicting coin tosses.
That's a certainly more rational position than believing your are smarter than the thousands of people with PhDs in finance or CS who pick stocks full time.
Any yes, what people on WallStreetBets are doing is gambling. Which is perfectly fine, I just wish more would acknowledge it.
Amazon growth has been predicated on cannibalizing other companies since 1995. Bezos was very specific about that in the business plan he presented to investors: he wanted to own all of retail, and has largely succeeded in that.
From a valuation perspective, what's so wrong about that? You want to be on the side taking over the world. Otherwise you're on the side that's getting taken over, and the value of your equity logically trends toward zero.
Stock prices are absolutely inflated, and as a small-scale investor I'm scared.
However, I'm not pulling out because realistically, there's no other asset that's safer in the long run. Interest rates are close to zero so returns in bonds are low, inflation will eat away money held in cash deposits and don't even get me started on cryptocurrency, rare sneakers or other "alternative investments". I started investing in stocks in 2017, even then people were warning that we were in a bubble that was bound to burst at some point. Not investing would have missed me several years of above-average returns.
But today, there seems to be a bubble on everything after all the money printing. So I'll keep investing in good, underhyped and stable companies and try to weather whatever storm, good or bad, will come in the next years.
>So I'll keep investing in good, underhyped and stable companies and try to weather whatever storm, good or bad, will come in the next years.
This is the obvious strategy, reduce your risk tolerance and go with proven companies. Put your money (fresh from your bank account, not from your portfolio) into moonshots when you can afford to lose them, after that put the moonshot money back into your boring but relatively safe investments. There are low volatility or stable dividends ETFs that specialize in this.
So if earnings increase 3x the P/E goes back down to ~10.
KO has excellent margins - last time I looked they were around 60%. That means prices * sales only has to increase by 5x to bump earnings up 3x. Food prices have been inflating at 10-15% recently; 15% inflation over 11 years will get you there, and that doesn't include any growth in sales at all. These aren't unreasonable assumptions, given the macro environment: another 1970s inflationary episode would do it. (Indeed, Warren Buffett made a lot of his money investing in Coca-Cola and See's Candies during the 1970s.)
> margins - last time I looked they were around 60%. That means prices * sales only has to increase by 5x to bump earnings up 3x.
I am not sure about the logic (are you assuming marging expansion?) but probably you are trying to say something else than revenue has to increse "only" five-fold for earnings to triple.
> Food prices have been inflating at 10-15% recently;
I'm not sure I follow all the arithmetic here (I'm pretty sure that, at fixed margin, revenue would only need to increase by 3x to increase earnings by 3x), but I did follow up to see what Berkshire had paid for Coca-Cola.
This thoughtful Quora post claims that Buffett made his first purchase of KO at a P/E of 29.
Don't get me wrong, in the timespan of an individual's life it may well make sense to heavily buy into this system. I'm just making the point that it's current form is rather new and appears loosely connected to the real world and is subject to change.
To me, the current stock market seems like a fiat currency without the threat of physical force. Maybe the temptation will be to increasingly merge government with large companies in order to keep the plates spinning.