[unmole]

> Buying stocks in a company is effectively loaning money to the company.

It really is not though. Unless you muddle the definitions of debt, equity and ownership to the point of uselessness. Then again, this is the same book that blithely conflates credit with benevolence.

[dilippkumar]

You are right that it does muddle definitions. However, in this case, it actually helps to squint and see a blurry picture to get a better sense of the bigger picture.

Unless you are buying enough of a company to get access to a board seat, you effectively have zero control over a company. Buying 1 share of Google gets you such an insignificant fraction of a company.

Yes, buying shares is theoretically equivalent to buying an ownership into a fraction of the company.

But that’s not actually a useful model. Asking “do I want to give money to this company that they may choose to never return?” helped me understand a lot of what investing really was much much better.

[unmole]

> Unless you are buying enough of a company to get access to a board seat, you effectively have zero control over a company. Buying 1 share of Google gets you such an insignificant fraction of a company.

I have zero interest in having control over any company I'm invested in. Which I assume is the case with the overwhelming majority of retail shareholders.

> But that’s not actually a useful model. Asking “do I want to give money to this company that they may choose to never return?” helped me understand a lot of what investing really was much much better.

I am having a hard time understanding why this is a useful way of thinking about equity investment. In the most common case i.e. in secondary markets, you aren't giving the company any money by buying stock. And in the most common case you don't want the company to return the money.

[dilippkumar]

> I am having a hard time understanding why this is a useful way of thinking about equity investment. In the most common case i.e. in secondary markets, you aren't giving the company any money by buying stock. And in the most common case you don't want the company to return the money.

I don’t know how well this translates to different people with different approaches to life and investing styles, but here’s my thoughts on it.

If you want to start with first principles and understand how to invest, you need a foundational model to start building theory on.

Modeling investing as a loan made to a company where the company can choose to not return money at all comes with all sorts of nice properties. The first question you ask is “if I give them money, will they eventually be able to return it?” which will make you look into their business and figure out how much money they need to make to pay you back and when they can pay you back and who else they need to pay back and ultimately how much paying everyone back will cost them. Share buybacks then look a lot like companies paying back some investors and dividends look a lot like interest payments. This is fits very cleanly into all sorts of other models we have today.

Take a look at a plot of number of outstanding apple shares over the past 15 years. It’s abundantly clear that they’ve been “paying back” consistently over time. If that were a person looking to borrow money, you would happily lend money to them!

Take a look at American Airlines. They have a monumental amount of corporate debt and then they need to pay $10B back to all share holders. They were “paying back” their share holders at a steady clip until around covid and then they had to “borrow” more from investors and doesn’t look like they’re ready to go back to “paying” back just yet.

Obviously these are very unsophisticated models. But as a simple approximation, they work really well (for me).

If I were to go to a VC and “borrow” money from them, it’s very helpful to think about how much I can pay them back - it’s super easy to model that like borrowing any other amount of money.

And ultimately, it really does function as a loan from the investor’s perspective. You give away money to an entity expecting to get back that amount and then more. If that entity goes broke, you will not get your money back. If that entity does really really well, they can pay you back a lot more money and so on.

[unmole]

> Modeling investing as a loan made to a company where the company can choose to not return money at all comes with all sorts of nice properties.

Debt and equity are both modes of investment. We have different words for them because they mean different things. You are not Modeling investing as a loan, you are describing investing in equity.