It's already been happening in Japan I'm surprised this insanity hasn't hit the us yet. That's the only reason I haven't refinanced our house, cause I really do think this insanity will hit the US soon as well
b_b assumes that you already know like investy stuff so he gives you a simple answer but the simple answer you're looking for is this: A P/E ratio is a traditional measure of worth. Traditionally, you would buy shares of General Motors because owning shares of GM would pay you a small amount - a dividend - for every share you own. If you look up GE, it will tell you that the share price (today) is $31.89 per share and the P/E ratio last year was 6.40. That means that the average price last year, divided by the earnings last year, was 6.40, so $32/x = 6.40, which means GE earned around 20 cents per share. If you own a thousand shares of GM, you have about $32k of your money tied up in GM. However, last year it made you 1000 x 0.2 = $200. Not great, but hey, let's look at Tesla. Tesla is currently over two hundred dollars per fucking share. Its P/E ratio for 2015 was -51.51 - yes, that's a negative number. Let's say you have $32k locked up in Tesla - that's about 159 shares because Tesla. Set aside what Tesla's share price did last year (we'll get into that), and you discover that for having $32k locked up in Tesla, you actually lost $81. BUT THAT'S OKAY BECAUSE If you owned GM a year ago, you bought it at about $30. It's about $31 right now. If you bought Tesla a year ago, you bought it at about $250. It's at about $200 right now. And never mind the 20% kick to the nuts; Tesla the roller coaster has been up to $265 and down to $143. Woo hoo! So if you're a pussy, and you aren't a true capitalist, and if you don't subscribe to the Wall Street Journal, and if you think that speculators aren't the bold captains of industry they are, you're pissed off because your GM stock has been sitting there earning you $200 when traditionally, stocks that earn money were rewarded by the market. But if you watch Jim Cramer, and if you loved Margin Call, and if you can't wait to talk about your e-trade account and how you're killin' it, you're all about "buy the dip" and when you saw Tesla dump down to $140 you bought a lot of it and when you saw it cruise up to $260 you sold it and you're gettin rich, man, while all these other patsies are sitting there like the marks they are. b_b's complaint is that the whole "buy things that are worth something" approach to investing is getting killed in favor of the "buy things that you think you can sell to a greater fool" approach to investing which is heavily favored by conditions where it's easy to use other people's money to play with money. No lie. I saw Tesla take a hit Thursday, said "that will never last", bought $30k in fake shares, then sold them today because it was never going to last, and made $1000 in fake money. Because Tesla. None of that says fuckall about their cars. And that's why people like b_b are salty.
The idea of a modern stock makes no sense to me. You are buying future dividends from a company that in many cases either pays no dividends or pays very little. At some point it is highly likely that the company will go bankrupt and your stock will become worthless because very few companies survive over 100 years and even fewer over 200. So what you are really buying is paper in anticipation that tomorrow someone will buy your paper for more tomorrow that you bought it for today and that the company doesn’t go BK while you wait for the bigger suck. I don’t really see much difference between this model and your classic ponzi/pyramid scheme
Ok. So a few questions. More stable stocks, like GM are the kinds of stocks you'd want in a 401k portfolio, because it's like playing the long con. Right? Stocks like Tesla and Uber are more speculative, so they're only good if you're willing to spend your focus on them short term. They're not so good to put in a 401k portfolio, but they're good to gamble on. Sooner or later though, if the company shows it has staying power, won't it's market price be more realistic, like GM? Random question 1. Is there a connection between house speculation and stock speculation? Random question 2. Everyone always seems to talk about money like it's only good for spending and moving. Whatever happened to sitting on it? Would investing in GM directly be the Wall Street equivalent of stuffing my mattress? Random question 3. If everyone knows these stocks are over valued, why are they willing to risk money on them?
Believe it or not, your simple questions are kind of the underpinning of investment. You've heard the phrase "blue chip stock?" A blue chip is something that is worth money now, will be worth money later, and will pay you in the meantime. And yes. They're great things to own. Conservative investors tend to favor blue chips because it isn't so much about what they're worth it's about what they'll pay and how consistently. Well... not entirely. Tesla is what's called a "cult stock" in that it attracts interest from people who wouldn't otherwise give a fuck about it because of the cult of personality around Elon Musk, because they're doing something radical and new, because they're always in the news, etc. Uber, on the other hand, isn't a stock - you can't buy Uber unless you're an "accredited investor" (rich person with a proven ability to lose a shit-ton of money and therefore the sort of whale that gets to buy things that are governed much more loosely than the public markets by the Securities and Exchange Commision) and even then you'll have a tough time doing it. Uber is a venture capital baby - these are private companies that other private companies give money to because if and when their investment pays off, it won't be a few percentage points, it'll be an order of magnitude or better. Here's a list of ETFs that hold Tesla. the one that holds the most, Global's Alternative Energy Fund, owns a bunch of anti-oil shit. That's a fund you probably want to be in if you think the future is solar, wind, and all things not from Saudi Arabia. The one that holds the least, iShares SIZE, basically holds stuff that fits a certain portfolio profile for hedging. There are reasons to own Tesla other than being a wild-eyed lunatic... but there are more wild-eyed lunatics that own Tesla than that own GE. For example. Real estate is considered an investment sector that any financial advisor will tell you to diversify into from anywhere from 100% to 0%. Something that is talked about in financial circles is the "expense of money", which is how cheap loans are. The cheaper the loans, the more speculation. Using a low-money-down mortgage with a balloon payment is the way you speculate on real estate; using a margin account is the way you speculate on stocks. Or options. If you want to lose your shirt, play with options. The problem with "sitting on money" is that you face depreciation in the form of inflation. This is one of the things all the finance folx are pissed off about right now - when interest rates are low (or negative), everybody who had money in a pension or a bank account or whatever is actually losing money when before they were making it. Just a few hours ago I was looking up the price of an Atari 2600. Sucker was $199 in 1980, the equivalent of $590 now. If you put $199 in the bank at 5% interest in 1981, you'd have $551. If you put $199 under the mattress in 1981, you'd have $199 now. So you'll notice that the rate of inflation from 1981 to now is... well, a little under 5%. Yet the prime rate right now is 3.5%... and at 35 years of that, you're looking at $330. Which is kind of the equivalent of interest rates fucking you to the tune of $200 on your $200 investment which makes people salty. Look up the savings rate at Chase right now. It's 0.01%. That's a fuck-you rate. But these negative interest rates foreign governments are exploring? That's a pretty powerful incentive to take your money out of the bank (or mattress) and throw it at the stock market, right? I mean, you don't want to live off dog food when you retire, right? Which pretty much gives you your answer to 3: Because there's no. Fucking. Alternative. And that's why people like b_b, mk and myself are all apocalyptic about a bunch of bullshit math related to other people's money. Let's say you have $32k worth of GM stock. It's paying you out $200 a year. The rate of inflation right now is 0.82%. It's taking $262. You're losing $62 in purchase value and you're got $32k of fucking blue chip GM stock paying you out a dividend. Now imagine how you feel if you're going to retire in ten years and all of a sudden, the magical mythical wonder of compound interest suddenly fucking stops. And that's why these discussions are always more strident than it seems like they should be.More stable stocks, like GM are the kinds of stocks you'd want in a 401k portfolio, because it's like playing the long con. Right?
Stocks like Tesla and Uber are more speculative, so they're only good if you're willing to spend your focus on them short term.
Random question 1. Is there a connection between house speculation and stock speculation?
Random question 2. Everyone always seems to talk about money like it's only good for spending and moving. Whatever happened to sitting on it?
Random question 3. If everyone knows these stocks are over valued, why are they willing to risk money on them?
Ok. So I understood most of that. Followup question, related to most of that but going on a mild segue. What about investing in agriculture. Bacon, beef, soybeans, corn, etc. are all tangible, much like houses and land are. I'm sure the payouts aren't as glamorous, but they're probably a safer bet being that they're real, tangible goods. Though, on the other hand, they're also at the mercy of some very dangerous outside factors like the weather. Also, where do people trade futures and why are they different than stocks?
The tricky part about agriculture is it responds well to economies of scale. The problem with economies of scale is you can take less profit and still generate revenue. The problem with lower profits is you make less money. My mother loved to regale me with tales of her Great Uncle Mordechai, who sold his jewelry store in Moscow ahead of the Bolshevik revolution and opened a greengrocer's in Brooklyn because "at least you can eat the inventory." But I'm gonna go buy a $1 pineapple in an hour or so. If I go to the grocery store and buy me a Foster Farms chicken, it'll cost me $2 with my Kroger card. If I go to the farmer's market and buy one grown by the same person selling it to me, it'll cost me $26. Been there, done that. My wife's cousin "owns" a dairy farm in Wisconsin. They lease about 1500 acres. They have some mind-boggling number of cattle. They are three or four million dollars in debt and will be for the rest of their lives. They might be rich, but they neither dress, drive nor act like they have any more money than their parents, who are comfortably above the poverty line. I could talk a great deal about the economics of raspberry farming in Whatcom County, WA. I dug into that pretty deep before the dream died. You can expect between $10k and $50k in revenue per acre per year up there, but that means you need acres of raspberries. I could also talk about the economics of hazelnuts - a specialty crop that you'd think would be worth investing in. Turns out that the break-even on a hazelnut orchard is 18 years and the useful life of the trees is 35. Gray's Harbor County is the land of Kurt Cobain. Their #1 crop is cranberries. Some years they can't make enough money for cranberries to bother harvesting them. For several years in the '00s their #1 crop was actually meth. ____________________________________ "Futures" are contracts on the future value of something. These contracts are for less than the full purchase price - say I pay two cents on the dollar for the right to buy gas for $2.99 a gallon six months from now. If gas is $2.89 a gallon six months from now, my two cents on the dollar was a waste of money. If it's $3.09 I saved myself a little money. If it's $4.09 a gallon I have myself some valuable contracts that I can sell to someone else because now they can buy gas for $2.99 a gallon instead of $4.09 a gallon. Prolly worth 99 cents a gallon depending on how much gas they wanna buy, right? In an actual usage of futures, Southwest Airlines notoriously made a killing buying their aviation fuel futures ahead of the Iraq War by enough that they declared dividends while other airlines were merging. They got their gas (the majority of airline cost) at 1999 prices from 1999 to 2004. Meanwhile, Northwest went out of business. In short, futures differ from stocks in that they're options contracts that have an expiration date. But they're traded like stocks, albeit on different markets.
You're losing $62 in purchase value and you're got $32k of fucking blue chip GM stock paying you out a dividend. This is the stuff that gives me nightmares, when you actually get in to the math of it all. I don't understand why banks are buying junk bonds, throwing up negative interest rates, and generally trying to get money out of the mattress and into the...what, exactly? At this point aren't these banks and financiers just creating an even worse collapse down the road as opposed to letting it happen now?Let's say you have $32k worth of GM stock. It's paying you out $200 a year. The rate of inflation right now is 0.82%. It's taking $262.
Or set themselves up with a lazy portfolio of diversified ETFs and generally do fine. Here's the dumb part: There's "alpha" gains and "beta" gains and beta gains are those things that you get just by being in the market because it's a positive-sum game. You pile your money in you get your money out. There are ups and downs but over the long run you let it sit and you're fine. Alpha gains are gains you get by beating the market. It's a zero-sum game: for every winner there's a loser. And chances are good the guy on the other side of the table is a billion-strong hedge fund run by princeton quants practicing high frequency trading with insider information. And that's why most people without a real itch to scratch tend to just let it breeze by.
My grandfather was good at this stuff and he made a good chunk of money off Nortel before it crashed which is, if I'm understanding correctly, a good example of the greater fool thing. Is that what alpha gains are about ? Edit: Side note, what do you think about investing in medical marijuana companies in Canada ? The way I see it is it's going to be legalized next year so their ability to make money opens up pretty big too which I'm pretty sure helps stock prices. Also if it's not legalized by April 20th there will be enough buzz that stock prices will go up that day anyways, at least that's what happened last year.
Alpha gains are all about zigging while the market is zagging. What your grandfather did is called shrewd investing. The trick to medical marijuana is it exists in a questionable legal arena. There are plenty of companies in Colorado that have gone under and several that are making shit-tons of money. The problem with any industry that erupts in the midst of new regulation is those regulations might benefit some, might fuck others. Marijuana isn't "legal" (ORLY) in California, but it's legal in California. Los Angeles ended up with a shit-ton of dispensaries. Los Angeles passed a law grandfathering in a select handful of early-adopter dispensaries and banishing the rest. If you were an owner of one of those early dispensaries, you now live in a mansion and drive a Bentley (my wife has had several clients of this variety). If you were an owner of one of the later dispensaries, you are now fucked. On the plus side, you had about three years to make your money, so hopefully you did okay.
Fortunately, it's a pretty easy concept, so there isn't really a complicated way to explain :) It's simply the share price divided by the earnings per share. The average P/E can be calculated over time for the whole stock market, and right now it's very high. Many people take this to mean that stocks are overvalued on average.