Nobody believes in the EMH anymore. You are about 30 years behind in the literature, Recommend you a new book: "Confidence Games:Money and Markets In a World Without Redemption"
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Since I only took one economics class in school and am trying to understand these things on my own, I wouldn't be at all surprised if I was 30 years out of date. Thanks for the book tip, I will try and see if I can find a copy although the fact that it is listed as part of the "religion and postmodernism" series doesn't exactly inspire confidence.
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Doug wrote:
But in any case, you could use earnings per share instead of dividends in your valuation model. Even 5 years after the Nasdaq crash, people still scorn dividends at the expense of earnings. Of course, no one knows what future earnings will be, so the models are pretty useless, but that doesn't stop people from using them.
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I've heard the story about how earnings per share can replace dividends, but it never made sense to me. Stock owners never actually get non-dividend earnings.
They are simply informed of them on the quarterly balance sheet before they are reinvested. Stock holders are never actually given that money, so the earnings only value to investors would be on the assumption that the reinvestment will lead to greater dividends in the future. The price model would then have to be changed to include how the expected return on the investments would affect the quantity and timing of future dividends that they are expected to lead to. This seems highly dubious. In sum, earnings certainly can't be simply be interchangeable with dividends in any valuation model because investors aren't actually paid earnings whereas dividends have real value.
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Michael Pollak wrote:
Earnings can be paid out in dividends or invested in the company, in which case they represent capital growth. On the face of it, it seems to make perfect sense to say the growth in the value of your stock is proportional to the growth in the value of what you own (the piece of the company represented by the stock) plus the direct payments to you. A no dividend situation presents no real problem theoretically -- if a company is earning but not paying dividends it must by definition have grown by precisely the amount they didn't pay out.
Of course, the assumed proportion between the rate of growth earnings and price assumes that the base price is correct. And supposedly the rightsness of that can be appraised independently by looking at the ratio of the market capitalization to the value of the underlying assets.
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Doesn't this assume that the company has made good investments that yield precisely the same return as external investments (the interest rate used for discounting in the valuation formula)?
I don't see why stock valuations should have anything to do with the value of the underlying assets. The only situation where investors would care about underlying assets is if the company goes bust and its assets are sold. Even then, the company's creditors get first dibs.
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Doug wrote:
There's no value. There's only supply and demand.
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If the efficient market hypothesis isn't at least approximately correct, how are stocks even an ownership system?
-Alex
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