This is a deeply simplistic reading of stock trading.
People who buy (or used to buy) "blue chip" stocks in the hope of collecting a nice monthly dividend payout certainly see things the way you're describing.
But there are plenty of people who buy stock because they believe the stock price will increase for reasons that may or may not include profits. The idea that "gains in value of a company ... comes from profit" is some sort of glorified 1850-1970s view of how stock prices vary. Once we allowed for derivatives, amongst other things, this sort of simplistic approach to stock trading has become more and more of an anachronism.
To use amzn as an example, though they are hardly unique, lots of people bought amzn stock because they belived that other people believed that the stock price would increase.
We have entire sub-sectors of stock trading that use high level math and leading edge technology (and or day-trader gut feelings) to try to earn from fluctuations in stock pricing that are best a derivative of profits, but more typically 3rd order effects.
Once again, if the stock price outpaces profits, it is because the investors are expecting FUTURE profits.
You appear to believe that this is some anachronism. It is not. The people who believe it is not based on (expected future) profits are in for a rude awakening. If the expected future profits don't materialize, the stock tanks.
Why do you think TSLA jumped when Hertz ordered a ton of Teslas? It wasn't based on the value of that deal, it was based on the EXPECTED FUTURE PROFITS from the legitimizing effect on Tesla sales from Hertz' vote of confidence. People expect other rental fleets to now be buying Teslas. And those expected future profits just got priced in to the stock.
Of course, they could guess wrong. But the two numbers, stock valuation and profits, will inevitably converge.
ANY news that affects future profits is going to affect the stock price. All those mathematical models are just attempts to predict just what the magnitude of those effects will be.
Not realizing this is like looking at the thermometer today and drawing a conclusion about climate change.
> Once again, if the stock price outpaces profits, it is because the investors are expecting FUTURE profits.
This is just false. We live in a world where stock trading occurs based on at least 3rd order derivatives. My belief about her belief about his belief can drive me buying or selling stock.
I don't have to believe anything about future profits, I only have to believe that you believe that somebody else believes something about future profits.
But I don't even have to believe that. I can simply have an expectation that I can surf the volatility of a given stock, without regard for its "underlying causes", and make a profit doing so.
You don't actually think all those hedge fund quants do is some fancy computation of expected future profit, do you?
> The people who believe it is not based on (expected future) profits are in for a rude awakening. If the expected future profits don't materialize, the stock tanks.
The people who are no longer playing the simplistic game are already gone when that happens.
BTW, hedge fund trading is all about finding an edge based on:
1. executing a trade on breaking news ahead of the other guys
2. finding an unknown correlation between Event A and the stock price
The thing about (2) is once someone does find a correlation, that knowledge spreads out to the other hedge fundies, negating the advantage.
And then it's back to future profits. It always goes back to future profits. Bill Gates was asked once if he followed MSFT. He replied that he didn't, he just focused on making Microsoft profits and MSFT took care of itself.
I also remember a CEO who said at a company meeting that he'd adjusted the books to "what Wall Street was looking for". The stock promptly tanked. WS wants profits, not manipulation.
P.S. did you see what MSFT did yesterday? It jumped up quite a bit. Because of profits beating expectations. Not because of a 3rd derivative.
Despite having a good chunk of my "retirement" money in the market, I try to avoid paying much attention to it's day to day issues. So no, I did not see what happened to MSFT.
But look, the point is that there are two fundamental reasons to buy a stock. One is to collect dividends paid to stock owners (so called "blue chip" stocks). The other is because you believe the price of the stock will rise. (For the big players, there's also the issue of corporate control, but that's not a factor for most investors, even many institutional ones)
There are many reasons why the price of a stock will rise. One of them could be more people wanting in on the dividend payout, and them being willing to pay (a bit) more than the current price. That could happen due to demographic changes (ie. shifts in the number of people who want dividend paying stocks), it could happen due to a change in the expectation of what those dividends will be (as in your MSFT example).
But it can also (and demonstrably has) happen(ed) that the price rises because derivative beliefs about the likely future price. And that's precisely what happened in the case of amzn and dozens if not hundreds of tech startups over decades: there was never any profit (and in some cases there never would be any profit), but there was a belief about either:
1. that future profit would be above a certain level
2. the number of people who believed in 1, and so would drive the price up
3. the number of people who believed in 2, and so would drive the price up
4. [ repeat as deep as you think feasible ]
As for the Gates anecdote, I prefer the stories from German CEOs who express wonderment at the idea that anyone would pay attention to quarterly results.
Again, it all boils down to expectation of future profit.
It makes no difference (except for tax purposes) if the dividends are paid to shareholders, or if they are retained and the stock price goes up by the amount of the dividend. As the differing tax treatment of capital gains and dividends changes, companies change their dividend payouts to match.
> But it can also (and demonstrably has) happen(ed) that the price rises because derivative beliefs about the likely future price. And that's precisely what happened in the case of amzn
The future price reflects expectation of profit. Amazon actually creates quite a bit of profit, they just plow it back into the business.
> The value of a corporation is inevitably linked to its profits.
> Again, it all boils down to expectation of future profit.
Maybe you feel these are equivalent statements. I don't. I think they are fundamentally different. People's expectations about a company's future profitability are, to me, entirely different from a company's actual profit. Blue chip companies have stock values that are tightly tied to their actual profit, unless there's some reason to think they might be on the verge of some sort of breakthrough that will make the stock price climb dramatically (because of anticipated future growth). Non-blue-chips have stock values that have a substantial component derived entirely from 1st, 2nd or 3rd order expectations about profit, and this can move stock prices dramatically even though there is no actual change in the company's profitability.
So, if you had only said "it all boils down to (1st, 2nd or 3rd order expectation of future profit", I'd agree with you. But you started by saying "the value of a corporation is linked to its profits", and I can't agree with that except for blue chip (type) companies.
What do you imagine it is based on? Collector value? The position of Mars in the sky?
> I can surf the volatility of a given stock
You can make a profit in Vegas with your system, too, but you'll lose in the long run because the math is inevitable.
> You don't actually think all those hedge fund quants do is some fancy computation of expected future profit, do you?
Hedge fund long term results struggle to match the S&P 500. The owners of the hedge fund, however, do far better than their customers. All those commissions, fees, percentages and loads.
I put my money where my mouth is, and it's not in hedge funds.
The stock price can deviate for a time from the current profits, but it will inevitably move back to what the overall profit is.
The reason is simple. The gains in value of a company are when (revenue > expenses), i.e. it comes from profit.
> Taxes on corporate income are not taxes on the capital gains of those who hold corporate stock.
Yes they are, because they reduce the value of the stock (and hence the capital gains) by the same amount. There's no free lunch.