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I AM NOT AN investment expert. I am befuddled by such things as puts and calls. Who is putting what where?
I do know the difference between stocks and bonds. I know that bond prices go up when interest rates go down, and vice versa, and I eventually figured out why. I also know stock markets are used to raise capital and that shareholders are actually owners of a company, but with little power or influence, especially small individual investors. In addition, I know you can make money in the financial markets in two ways: increases in the price of a stock or bond, and through the payment of dividends or interest.
But then I get to the point where I don’t understand. What the heck is the yield curve and does it matter to me? And don’t even get me started on the VIX.
I have a relative who works in wealth management and we have interesting discussions about my failure to comprehend the difference between the stock market and a Las Vegas casino.
Here’s the thing: I’m told that what drives the price of a stock is earnings. Even outside factors, like the economy and political turmoil, all come down to their impact on earnings. But why do earnings drive the price of a stock? Because growing earnings create more value. Value for who? Shareholders. But how? Because they increase the stock price.
How much does this merry-go-round ride cost?
If I buy a stock that pays dividends, it seems to me that growing earnings should lead to higher dividends. That makes sense since, as an owner, I am supposed to share in the profits. Aren’t I?
But if a stock doesn’t pay a dividend, how do growing earnings create more value, except by people betting on something whose hoped-for higher price will be based on another person’s bet? See, we’re back in Las Vegas: We’re betting that there will always be some player willing to cover my bet with a raise.
Or are we betting that the stock will pay a nice dividend someday? If a company isn’t sharing its earnings with me—the shareholder—why should more supposed value by way of the stock price be created for me? Why should anyone be willing to pay more for the stock? Wait, I know: The company is reinvesting earnings in the business, to grow the business. To what end? Well, so people will pay more for each share.
Oh my! Just send me a dividend check, please. I’m an old retiree in need of an income stream.
Is there anyone else out there as confused and cynical as me? In the meantime, the casino—I mean, stock market—seems to be performing quite well. That’s a good thing, because one way or another most Americans are counting on it, even if they don’t realize it. I know I am. I don’t plan on getting off the merry-go-round. It may fund my next vacation. Want to guess where?
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Running in Place, Tortoises Needed, That’s Rich and Sharing the Load. Follow Dick on Twitter @QuinnsComments.
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The only thing I understands about stocks is that I needed them in my 401K. I used to believe that a company sells stock to raise capital to manufacture a product and in return they will pay you a dividend over the long term and everybody profits if the business model is good.
Today, hedge funds push boards into quarterly results based on share price taking the short term view on what I thought was a long term investment. Some companies have never paid a dividend and have no hard assets or products. Then you have short sellers betting as in gambling against you. Also there are the expert analysts who say that the stock market is down today because somebody squeezed and the next day they say that the stock market is up because the same person squeezed. My flavorite is that a company beats the analysts earning expectations but the stocks goes down.
As a amature investor, any information I get is so old that Wall Street has already acted on this information driving the stock price in whatever direction as to only hurt me. I like to refer to this information as outhouse information and they should just give it to you on toilet paper.
Berkshire Hathaway (Warren Buffet’s company) does not pay dividends on their stock. My wife and I will be buying two shares (B shares) soon, as a bucket list item. Then we can attend the annual meeting.