First, many companies pay no dividends and have no announced plan to do so. Can the value of the stock really be related to investors' guess that someday management will decide to start paying a particular sum out? If there are no dividends, is there any feedback mechanism forcing the stock to be priced "correctly"? It seems to me that when the company pays no dividends, a stock is just a worthless piece of paper (or database entry), except for investors imagination that it SHOULD be worth something. At least in the company I work for, stock voting rights are worth little to investors. There are two stock classes, one of which has three votes per share (the other one vote per share). Nevertheless, the prices are nearly identical.
Second, even if the company pays dividends, the discounted dividends formulation requires that investors have some idea of what future dividends will be. The price will be an sum of an infinite number of decreasing terms, but information about their values will quickly go to zero. In the case of non-dividend paying stocks, information may go to nearly zero before the summation terms become non-zero.
Finally, it seems to me that stock values shouldn't just include discounted future dividends, but also discounted future capital appreciation. A stock should be worth more now if there is reason to believe that its value will grow in the future. The efficient market hypothesis supposes that future price increases must be determined my company fundamentals, but I see no reason why this must be true even if everyone behaves rationally. If stock prices are increasing, it makes sense to be willing to pay more today, in order to sell for even more tomorrow even if the price increase has nothing to do with company performance.
I read the discussion about this in "Wall Street," but that didn't quite settle the issue for me. There, evidence is presented that investor irrationality leads to excessive volatility in prices even over fairly long terms. What I don't understand is how we can expect the market to ever price stocks correctly even if actors are all rational.
What am I missing?
-Alex
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