[joshu]

When you sell your share, someone else buys it. How do THEY value it?

someday in the distant future, the stock is going to pay a dividend. cash flows are what enable them to do it. eventually the company has nothing to do with the cash but to pay it out.

[dpark]

They might value it by expecting dividends, or they might value it by expecting the share price to grow, or they might value it by expecting a profitable acquisition. Hell, they might buy it hoping the company will liquidate and disburse its holdings. Dividends are only one possible payout that can come from buying stock.

You and jcampbell are making the same mistake. You're looking at dividends, seeing a reasonable explanation for stock pricing, and then simply asserting that what's reasonable must be true. But it's not true. A ton of things factor into stock pricing and value. Some are rational, like attempting to estimate the future value of dividends or an acquisition. Some are irrational, like assuming that upward trajectory will continue "just because". And others are in the middle, like believing that timing the market is possible.

[joshu]

Unfortunately, I am perhaps summarizing too aggressively. And this format does not really lend itself to a discussion.

Companies make money. They either pay out the revenue as dividends or invest in the company. Eventually, they are unable to invest in the company, at which point the revenue leaves the company in the form of dividends.

I'm not saying that people don't have a variety of reasons for thinking the stock will move or be worth more or less.

My point is that the UNDERLYING VALUE of the stock is that it represents a future revenue stream. The reason the price moves up or down is due to supply and demand actually changing. And the reason that happens is that some subset of people think that the stock is under or overpriced.

Thinking that the stock price represents anything other than the aggregate opinion of the value of the stock is going to be difficult unless you want to deny the efficient markets hypothesis.

(I actually spent years as an algorithmic trader. But what do I know?)

[dpark]

I generally agree with what you've written there. I think we're mostly arguing shades of gray.

On the topic of the efficient market hypothesis, there was a paper published a while back that purportedly disproved the hypothesis in the general case (basically, the potential number of data points can grow larger than the available computational/cognitive power of the market). I'll see if I can dig that up later. I think specific cases could potentially still hold, though, at least theoretically.

[joshu]

A long time ago someone came to present a paper to us that showed that people trading without information (eg momentum traders you mentioned above) impact the stock price much less than those trading with information. So I suspect that the more people know the more efficiently they themselves move the market. This might solve the "too much information" paradox you mention...

[joshu]

Here's the same discussion: http://ask.metafilter.com/71639/What-are-stocks-actually-wor...