Stock Ownership

Doug Henwood dhenwood at
Sun Apr 30 13:32:50 MDT 1995

At 4:32 AM 4/30/95, boddhisatva wrote:>

                To Mr. Keen, Mr. Henwood, and the other economists among us,
>        What is the current state of the theoretical explaination for where
>the money received by those owning stocks which appreciate in value "come
>from" ?   Through what hideous appendage does the parasite absentee owner
>suck his green blood ?  What is the relationship with interest ?   Does
>the capitalist's craven dread of risk that causes him to raise interest rates
>and insurance premiums have any relationship to the general rate of
>appreciation that managements must offer ?  I ask this since the investor
>generally does not look for dividends (a more obvious form of profit) for the
>larger part of his return.

A rise in prices is the result of a rise in expected profits, which may or
may not be justified by a real improvement in prospects. Over the very long
term, the stock market is driven by fundamentals, i.e. profits, but over
the short and medium term it wanders all over the place, typically
overshooting the fundamentals on both the up- and downsides.

This is the source of unrealized, or paper gains. Gains are realized only
on the sale of stock, which means that one rentier's profit comes from the
optimistic evaluation of other rentiers. (Or as Alan Abelson used to say in
Barron's ads: You buy a stock because you think it's going to go up.
Problem is, you buy it from somebody who thinks it's going to go down.)

Higher rates = bad for stocks. Lower rates = good for stocks. There are
some exceptions (e.g. 1929-32), but not many.

Don't scorn dividends. They account for a large share of stock returns, and
if reinvested, compound like magic. US corporations pay out anywhere from
50-80% of their after-tax profits as dividends (depending on whether it's a
good year or bad).



Doug Henwood
[dhenwood at]
Left Business Observer
250 W 85 St
New York NY 10024-3217
+1-212-874-4020 voice
+1-212-874-3137 fax

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