Friday, November 20, 2009

On Real Values (Or, Why I Think Stock Has No Intrinsic Value)

Basic economics says that every item has some "real" value to it based first on a concept called utility value. Second, it has increased or decreased value based on scarcity (supply). Third, it has increased or decreased value based on the various subjective views of the population about said item (demand). I think we can all agree that these are the basic factors surrounding any item.

It is also of note that classic liberal economic theory assumes that the first concept above (what we might call intrinsic, 'real' value) applies to any/all manufactured good and is widely recognized by any/all given populations (IE, build it and they will come, a supply creates its own demand) which is usually true but not always (and the theory is thus 'false' by predicative logical standards).

Why do I mention this when by the title I clearly wanna talk about stock? Because stock is that rare thing which has absolutely no intrinsic value by the virtues of its own existence. That is, the only reason people value it, is because they think they can convince someone else that it's worth more than its current market value (IE they think its 'value' is going to rise amongst the population at large). I should admit, though, that just as a half eaten hot dog has increased value if the other half is in some celebrity's stomach, there is _some_ intrinsic value to owning some nth of a company simply because it's an nth of a certain company (which may have a bit of a celebrity status of its own). And, obviously, owning a large percentage of a company enough to exert influence on the company, and/or stock with regular dividends have their own intrinsic values. But, I digress.

My main point is that, the idea of buying something ONLY because you think you can turn around and sell it to someone else for a higher price especially when said good is pretty much intangible in and of itself... is fundamentally flawed. And, I wonder if, if we didn't have people messing around with stuff like this (especially the derivatives market) the free market would be totally stable?

If you're wondering what got me thinking about this it's Warren Buffet, and a discussion in our business finance class about his idea that a good company never gives their shareholders dividends... I would argue that the idea of holding onto stock (no matter how high the 'value' goes) solely for the purpose of seeing the value increase is patently absurd. Because, again, if the stock is only serving as a better way to store money than ... well, money... what's the point? I mean, sure, you could make oodles of cash, but Buffet's company is strictly nonproductive, only ever redistributing money and capital in the economy, and usually not in the sense of initial investments. I come back to wondering, what is the stock really worth at that point? It's never going to be a controlling interest in the company (in fact, B stocks from Buffet's company can't EVER have voting rights), and the company itself has a relatively low intrinsic value (compare to a company that manufactures something) so the stock has basically none. I dunno, economists out there, am I making sense or am I off my rocker?