Why Do Stocks Go Up?

[wabmester]

Originally Posted by brewer12345

Wab, this is pretty basic so I suspect the answer is yes, but did bernstein factor in dividends?

No, he was just looking at market cap growth.* *Dividends seem to be the only reliable return from stocks, and of course you generally have to pay a lot more for those dividends than you used to.

In the long-run, stocks will give you something like inflation + economic growth + dividend yield - dilution.* * But as Japan shows us, that dog can stray waaay off the path and take a lonnnng time to get back on.

I find it a lot easier to fully analyze and get comfy with individual securities simply because I can pull them apart and look at the guts.* Hard to do that with a total market fund.

Did you see MOVI today!?* *Whoo boy.* *Talk about a stock where analysis will make you comfy!* *While the US market is pretty transparent, it's still way too easy for individual companies to hide their skeletons.* *That's why I prefer to look at the sector level or higher.

[brewer12345]

I think the calculus you offered is missing one item: stock buybacks (as a deduction).

i guess you pick your shots and take the risks you are comfy with. Sometimes, you get it wrong. Hopefully the good decisions outweigh the bad ones. They have for me.

[Scrooge]

Originally Posted by ladelfina

I also agree that the US will tend to be stronger overall due to what you and brewer have already mentioned: more transparency, generally speaking less corruption, and less government interference in business. (Haven't paid much attention the Yukos story, for example, but things like that are likely to turn off foreign investors to say the very least.)

Investing in opaque economies can be incredibly lucrative if you know the right people. For example, I am about to close an incredible deal in Nigeria next week!* 8)

[ladelfina]

Is it with a relative of a deposed member of a military junta whose assets have been unjustly frozen?

These sites are a riot!
http://www.potifos.com/fraud/
http://www.svbizlaw.com/nigerian.419.letters.htm

Now I know why my mother is "afraid of the Internet".. probably a good thing (tho' she'd be unlikely to fall for something like this, thank goodness).

[Nords]

Originally Posted by Scrooge

Investing in opaque economies can be incredibly lucrative if you know the right people. For example, I am about to close an incredible deal in Nigeria next week!

Originally Posted by ladelfina

Is it with a relative of a deposed member of a military junta whose assets have been unjustly frozen?

Last week my FIL, my MIL, and my BIL all won the Spanish lottery. They're contacting their Nigerian bankers for a loan to pay the shipping fees on the Spanish winnings.

I'm pretty sure that I'm next. I'll win millions and be able to quit my job.

I'm halfway there-- I've already quit my job!!

[free4now]

I'll give a cynical but I think true answer to why stocks go up over time: externalized costs.

Corporations rape the environment and the population, by not paying the true costs for the damage they cause in the course of their operations. Go see the movie "The Corporation" if you want to understand how this is so.

Phillip Morris stock goes up because they are convincing new people around the world to smoke their product. But MO doesn't pay the health care costs for all the lung damage that is caused by those changes they wrought, that is shifted onto future generations, and paid by various governments and private individuals. So in effect this is a transfer of wealth from future generations to current MO stockholders.

This effect happens more often with environmental damage. 3M produces toxic chemicals as a part of their manufacturing process, and figures out ways of shifting the burden for cleanup of those toxics onto governments and private individuals, often members of future generations. So in effect those future generations are subsidizing current 3M shareholders.

I believe this effect of externalizing costs onto future generations is the biggest reason why stocks on average go up over time. It will end whenever governments and individuals figure out ways to make corporations accountable for their externalized costs. I don't see that happening until the world has been so seriously poisonned and depleted that there is no other way. That will likely be way after my lifetime, so I'm betting on index funds keeping on going up for my lifetime.

[. . . Yrs to Go]

Originally Posted by free4now

Corporations rape the environment and the population, by not paying the true costs for the damage they cause in the course of their operations.*

I believe this effect of externalizing costs onto future generations is the biggest reason why stocks on average go up over time.*

Hogwash.

Notwithstanding substantial economic growth over the past several decades, many man-made sources of pollution have declined. Air quality is a case in point:

Originally Posted by Environmental Protection Agency

In 1995, the first year of implementation, SO2 emissions decreased by 24 percent—nearly 4 million tons—from 1990 levels. During the past decade, SO2 emissions dropped an additional 13 percent from 1995 levels despite a 20 percent increase in utilization (based on heat input). In 2004, SO2 emissions from all Acid Rain Program units totaled 10.3 million tons, a 34 percent decrease from 1990 levels (15.7 million tons).

Over the same time frame that air quality was improving the S&P 500 tripled - hardly the correlation your theory would suggest. The reality is that the wealth created by economic progress allows us to spend more to improve the environment. For developing countries like China, environmental protection takes a back seat to feeding the population - not so in the US where we can afford to feed ourselves while simultaneously spending billions to retrofit power plants with environmental controls.

[. . . Yrs to Go]

Originally Posted by wab

I find this the most compelling argument so far.* *For companies producing commodity widgets, their growth is limited by demand, regardless of how much of their earnings they reinvest.* But for companies that leverage their human capital smartly, by continuously creating new products and new demand, their growth is basically limitless.

So, the spoils should go to the country with the most innovation, and there should be a high correlation between equity growth and an educated populace, right?* *I'll have to dig into this some more.

Interestingly, I compared the price growth of Phillip Morris (Altria) -- a commodity maker of tobacco products with the growth of 3M, who's stated mission is basically "to make things that didn't exist before."



And that's just price growth without dividends!

BTW, MO is supposedly the only stock that Bernanke owns.

But the description also includes selling existing products to new customers in new markets. There is a lot of growth to be had selling addictive consumables with low price elasticity to a growing world population.

[wabmester]

Originally Posted by 3 Yrs to Go

But the description also includes selling existing products to new customers in new markets.* There is a lot of growth to be had selling addictive consumables with low price elasticity to a growing world population.*

I compared MO to MCD and PEP, and they all have similar long-term growth (and they all grew much faster than the S&P 500). So market penetration into growing world-wide populations seems to be a bigger factor than "addictive" or "low price elasticity."

That seems like a pretty compelling argument for buying stock in companies with strong world-wide brands: your investment should grow at the rate of global population growth + inflation.

[. . . Yrs to Go]

Originally Posted by wab

That seems like a pretty compelling argument for buying stock in companies with strong world-wide brands: your investment should grow at the rate of global population growth + inflation.

Well, the historic performance of the companies you reference is more likely the result of expansion into new global markets than global population growth. We forget that although McDonald's is ubiquitous here, there are still areas of the world where a Big Mac is a new (and perhaps a luxury) product. To the extent a company can expand into these new markets it can grow faster than the economy, or the market, as a whole.

But picking these companies ahead of time is a tricky business. Solid brand name products, tastes, and business models do not always translate effectively overseas. For existing global brands, the rate of growth may easily slow from past trends due to market saturation - you can only grab so much world market share.

[. . . Yrs to Go]

Productivity (the be all and end all of wealth creation) has been accelerating in recent decades, not slowing down.

Originally Posted by wab

I've heard that, but I don't really understand it. * There has to be a limit to how much work we can squeeze out of one person, right? * Are we approaching that limit? * No idea. *But a lot of people here probably felt burned out by work.

I don't think we are approaching a productivity limit. Information technology continues to revolutionize the way we do things.

1) ATMs reduced the number of bank tellers
2) Word processors and copy machines eliminated scores of typists
3) Gone are the days when legions of accountants would toil away over hand written ledger books
4) Call trees with voice recognition software are reducing the number of call-center operators (i.e. don't worry so much about call-center outsourcing to India - its a dieing business)
5) E-mail and distributed networks greatly reduced the time it takes for geographically disperse workers to collaborate on projects
6) Electric utilities are installing automatic meter readers
7) Improvements in robotics continue to reduce the need for manual labor

Who knows what will come next.

[free4now]

Originally Posted by 3 Yrs to Go

The reality is that the wealth created by economic progress allows us to spend more to improve the environment.* For developing countries like China, environmental protection takes a back seat to feeding the population - not so in the US where we can afford to feed ourselves while simultaneously spending billions to retrofit power plants with environmental controls.

Agreed. The USA does a much better job of protecting the environment because it has the wealth to do so. China does a much worse job of protecting the environment because it doesn't have the cash flow to do so.

This comparison of USA and China supports my thesis that growth comes largely at the expense of the future generations. The USA would be growing much faster if it didn't have to divert profits into environmental protection. China is growing fast in large part because it isn't spending money on environmental protection.

[d]

China does a much worse job of protecting the environment because it

... chooses to; just as the US is doing a better job, because it chooses to.

[spideyrdpd]

Although many corporations will go outside the us to avoid the rules.....

What I never understood is that companies stock seem to go up on the rumor that there will be good news. When the news pops everyone sells.. and the shares go down .

[kcowan]

Originally Posted by spideyrdpd

...
What I never understood is that companies stock seem to go up on the rumor that there will be good news. When the news pops everyone sells.. and the shares go down .

Market timers and day traders. They create most of the short-term volatility: Buy on rumour and sell on news.

[Nords]

Originally Posted by kcowan

They create most of the short-term volatility: Buy on rumour and sell on news.

Or Rothschild's anecdotal & apocryphal "Buy on the cannons and sell on the trumpets"...