Stocks and marxism

[RGacky3]

As far as I know Stocks and other securities, are called by Marx fictitious Capital, or an extreme version of commodity fetishization.

In the sense that when it is sold by a company, what that company is essencially selling is a piece of fictitious capital, in exchange for real capital, money, once that trade is made you have an entire stock market based on this fictitious capital, the prices go up and down based on the percieved value of this fake capital.

You have no right to get your money back from the company, and retrieve your share of the company in real cash, or any sort of capital, nor do you have any right to any of the surplus value (overhead and profits) of the company, one might say "dividends" but dividends are not compulsory, and they can be given or with held anytime the board of directors decides to do so.

Once on the market the ONLY thing moving the price is the percieved speculative value of the stock, no one will ever consume a stock, no stock can be exchanged for a monitary share of the company or its profits.

The stock is only tied to the fundementals as long as people price it based on the fundementals, which is not always the case, and generally due to speculation and technical trading is way off.

This is why its fictitious capital, its created out of thin air and has no value, it has a price yes, but there is no value behind it, it is essencially capitalism creating an entirely fake market in order to keep itself going, a fake market with fake capital.

Heres a nice quote.


"The public stocks and canal and railway shares had already by the 23rd of October, 1847, been depreciated in the aggregate to the amount of £114,752,225." (Morris, Governor of the Bank of England, testimony in the Report on Commercial Distress, 1847-48 [No. 3800].)
"Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital."


I'd like to get the pro-market people's idea about this, is Marx right?

[RichardAWilson]

I have to disagree to a certain degree. Things were different in Marx's time than now. Shareholders now control the Board of Directors, which means that they do, in effect, "claim" a corporation's earnings (surplus value). There is value behind a stock.

However, the problem arises when, as you mentioned, price diverges from value. Wall St. often knows the price of everything and the value of nothing. A strong dividend yielding stock, such as Microsoft, should fetch a higher earnings multiple than a tech start-up.

Wall St., to quote a favorite song, builds "castles in the sky." - Wall St. is marketing. Most small "investors" will never even earn an average return. - Someone has to pay commissions and bonuses to the fund managers.

Furthermore, to the degree that it's casino-like, Wall St. has become a massive Pump and Dump Scheme, whereby the St. pushes stock values higher to lure the working classes into them and then, when the stock prices have peaked, the rich dump their stocks and pocket the profit - leaving smaller investors holding the bag.

As more and more "small investors" have entrusted their life savings with "the St.," the importance of dividends has declined. Mutual funds and such are concerned more with capital gains than dividends - which is the reason many companies don't offer dividends. -

The shareholders (Institutions like Goldman Sachs and Merrill Lynch) aren't even asking for dividends.

In truth (the raw truth that Wall St. doesn't tell you), unless you're a skilled speculator, you shouldn't be investing in stocks unless (1) you're investing for the dividend (not the capital gain), (2) you plan on holding irregardless of what happens in the short to medium term. In the long run, the average stock doesn't yield much more than a high-rate Corporate Bond.

In contradiction to Random Walk Theory - Efficient Market Analysis, even a basic investor can "outperform" the market's average.

Phillip Morris, one of the highest dividend yielding stocks, has (assuming you've reinvested the dividends) consistently outperformed the S&P500.

As such, stock investing should be viewed more as saving than investing. - unless, like I've said, you're a skilled speculator.

A speculator trades Google and Apple, an investor (saver) purchases and holds Pfizer and Microsoft.

[RichardAWilson]

That doesn't mean there aren't forms of fictitious capital. - Derivatives, options and even certain futures are purely fictitious.

Using financial leverage is often fictitious - I.e. borrowing money to invest in stocks. Once again, unless you're an ultra skilled speculator, you should never borrow on margin.

[RGacky3]

Shareholders now control the Board of Directors, which means that they do, in effect, "claim" a corporation's earnings (surplus value). There is value behind a stock.


That actually was the case back then more than it is now, shareholders have very little actual control over what the board of directors does, infact many stocks are non voting, even if they are, most of it is just down to rubberstamping the boards decisions.

The only way you can retain real value being a shareholder is a having a majority share and actually controling the cash capital.


However, the problem arises when, as you mentioned, price diverges from value. Wall St. often knows the price of everything and the value of nothing. A strong dividend yielding stock, such as Microsoft, should fetch a higher earnings multiple than a tech start-up.


I would say there IS NO value, the value of the company and its corrolation to the stock is ficticious.


In truth (the raw truth that Wall St. doesn't tell you), unless you're a skilled speculator, you shouldn't be investing in stocks unless (1) you're investing for the dividend (not the capital gain), (2) you plan on holding irregardless of what happens in the short to medium term. In the long run, the average stock doesn't yield much more than a high-rate Corporate Bond.


Except investing FOR Dividendends is a pretty crappy investment, considering you won't really get that high of a return.


That doesn't mean there aren't forms of fictitious capital. - Derivatives, options and even certain futures are purely fictitious.


I would argue that they are just as fictitious as stocks, when your buying an option its not considered purchasing capital, its more placing a bet, the same with futures, there is no capital being traded, it is fictictious capital and treated as such, the difference is that, for example futures or options on commodities or physical capital is one thing, when applied to stocks its essencially a fictitious piece of capital tied to another one.

Its not even pump and dump schemes I'm talking about, its the whole market, fluxuations are made on technical basis' which have nothing to do with underlying value, even when they are based on fundementals the only thing tying it to the fundementals is almost always just the belief that others are doing likewise.

[RichardAWilson]

Back in Marx's time, the main shareholder was the founder and owner of the business.

Today, institutions are the main shareholders - and they do a better job at maximizing shareholder return.

There are stocks (utilities and pharmaceuticals) that yield 5%, which is much more than can be obtained from savings and bonds.

In the long run, there's an obvious correlation between value and price. Markets undergo corrections from time to time when perception (price) is separated from reality (value). I.e. The crash of 1929, 1987, 2001 and 2008.

[RGacky3]

Today, institutions are the main shareholders - and they do a better job at maximizing shareholder return.


But that does'nt change the nature of the stocks, which are still not tied (in general) to any real value in the company, the only thing tying to that is faith. Of coarse you can make a return buying and selling fictitious capital, but that does'nt mean there is any underlying value in it.

Marx's discussion of fictitious capital was directly discussing public stocks, not privately held buisiness.


As for dividend yields, you'd be surprised. There are stocks (utilities and pharmaceuticals) that yield 5%, which is much more than can be obtained from savings and public bonds.

Yes but that is not actual value, as I said that is entirely up to the discression of the board of directors, who may stop dividends at any time they wish.

[RichardAWilson]

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This almost mirrors the yield on 10Y Treasury Bonds.

[RGacky3]

In the long run, there's an obvious correlation between value and price. Markets undergo corrections from time to time when perception (price) is separated from reality (value). I.e. The crash of 1929, 1987, 2001 and 2008.

Sure, but I am arguing that the only thing tying the 2 together is the idea that other people are and will do the same, its basically faith.

Also many people might argue that the booms and busts are not corrolated to acual value, but just reactions to value, for example when stocks go way up, it may not be an increase in assets or profits that is raising corrolated to the stock price, the same when it crashes.

But I'm sure there are statistics on this, corrolating assets and/or profits to the stock prices, and I'm sure there is a corrolation, I'm just saying these corrolations are fictitious (not based on any concrete connection, juts a belief that others are connecting them too).

[RGacky3]

what is that a graph of?

[RichardAWilson]

Fundamental value is tied to dividends and surplus value. This is the reason that stocks and bonds are correlated (higher interest rates push down stock values).

[RichardAWilson]

The graph is the dividend yield for the S&P500.

[RGacky3]

Fundamental value is tied to dividends and surplus value. This is the reason that stocks and bonds are correlated (higher interest rates push down stock values).

Surplus value? how is that corrolated to stocks.

Dividends is one thing, higher interest rates just means that people invest in bonds more than stocks, its just supply and demand, less investment in stocks obviously means less dividents.

If dividends are tied to profits thats one thing, but they are not, unless the board decides they are.

[RichardAWilson]

Surplus Value = Profit. Stock value = Profit and Dividends (which are paid from profits).

[RichardAWilson]

The Board of Directors are elected by shareholders. Like I said, some of those shareholders (mutual funds and institutions) aren't asking for dividends.

Millions of Americans own stock. However, those Americans aren't shareholders. If you're investing via a 401, you aren't voting because you don't directly own the stock - your mutual fund holds the stock and reserves the right to vote for you.

Let me use an example: To maximize long-term shareholder return (Google) should be paying dividends. However, to maximize short-term return, (Google) should bank the cash and waste it on making acquisitions (like it did with Motorola).

Most of Google's "investors" are speculators, so they care more about the stock price today than the company's long term return.

[RGacky3]

Surplus value is controlled by the board, they can pay out dividends if they like, or they can pay themselves, or they can spend it on reinvestment, or buy new office furnature.

If they decide to pay dividends it is not necessarily tied to profits, profits can go up 20% and they can keep the same dividend rate, or raise it 50% or drop it all together, there is nothing tying the dividend to anything.

You cannot argue that the price of stocks is determined mostly by dividend rates, most stock trading is done for resale.

[RGacky3]

The Board of Directors are elected by shareholders. Like I said, some of those shareholders (mutual funds and institutions) aren't asking for dividends.


Common now, you know the corporate structure is FAR from democratic, the board of directors are selected by the CEO, who get rubber stamped by the shareholders (yes or no), its EXTREMELY rare that a corporation's shareholders take an active democratic part in a company.

[RichardAWilson]

There are numerous cases of Executives being fired by shareholders. The CEO is beholden to shareholder interests. Like I said, most of these shareholders are institutional. You're right that corporations aren't extremely democratic, but they are more democratic than they were during Marx's time and they are held accountable to their shareholders.

(Institutional) Capitalism is much more hostile than capitalism during Marx's time. If the Board isn't doing a good job, it can be replaced via a hostile takeover / an acquisition. Investment bankers and fund managers don't care about family ties, legacies and individual interests. The Executives (Board Members) know this, which is why they've had to demand Golden Parachutes in their contracts. - Severance Packages were uncommon even during the 1960s.

[RichardAWilson]

I'm not claiming stocks aren't speculative (stock prices are often fictitious).

All I'm stating is that there is an underlying value. Prices are, in the very long run, correlated with that fundamental value.

[RGacky3]

You're right that corporations aren't extremely democratic, but they are more democratic than they were during Marx's time and they are held accountable to their shareholders.


I don't know if thats true.


There are numerous cases of Executives being fired by shareholders.

Thos are very extreme cases with very specific circumstances, I.e. the shareholders had enough clout and solidarity to pull it off, thats mostly not the case.

But either way, what is it that ties the price of the stock to the fundementals of the company, dividends cannot be the answer.


If the Board isn't doing a good job, it can be replaced via a hostile takeover / an acquisition. Investment bankers and fund managers don't care about family ties, legacies and individual interests.

That may happen, but what is the thing tying the price to the value?


Prices are, in the very long run, correlated with that fundamental value.

How? Whats the connection, I am saying the connection is fictiteous.

[RichardAWilson]

The connection is corporate earnings and an inverted relationship to bond yields.

[RGacky3]

Those are not causal connections.

[RGacky3]

What I mean by that is those are not causal connections from assets or profit to stock price.

One is only connected because people believe other people are pricing based on that.

The other is simply supply and demand.

[RichardAWilson]

The fundamental value can be arrived via discounting. It would make sense to purchase a competitive dividend yielding stock even if the stock price was expected to fall. However, since dividends are based on earnings, a stock's value is tied to expected earnings. The inverse nature dictates that higher bond yields will make those earnings less enticing.

You're right though that there's no "law" that a stock's price has to match the stock's value.

[RGacky3]

dividends rarely are the determining factor in stock price.

I'm arguing that a stock as not value, what it does'nt match is the companies asset value.

[RGacky3]

To be clear I am not saying neccessarily that fundentals trading is a bad idea, but I'm just point out that it only works because other people are also doing it.

[RichardAWilson]

It's not going to match the company's book value. It's going to match expected earnings and expected book value. A fast growing company (which a high return on assets) will outperform a slower growing company (with a lower return on assets).

[RichardAWilson]

http://en.wikipedia.org/wiki/Stock_valuation

http://en.wikipedia.org/wiki/Discounted_cash_flow

[RGacky3]

It's going to match expected earnings and expected book value. A fast growing company (which a high return on assets) will outperform a slower growing company (with a lower return on assets).

But what is tying it to the expected earnings is dividends? I don't think so, I'm saying the only thing tying it to earnings is the idea that other people are doing the same. Thats why Marx calls is a fictitious capital.

[RichardAWilson]

The problem there is that it doesn't matter what everybody else is doing. A stock has value irregardless of price.

There are numerous cases where one should invest in a stock even if one thinks the stock price is going to fall.

1. The stock price has fallen below book value. In such cases, companies can be liquidated and returned to shareholders as a profit. Stock prices never fall below book value (assets minus liabilities) for too long. (Value Arbitrage) This was common during Reagan's first term. Hostile takeovers were common because of this feature (stock prices fell below book value). Companies were worth more divided into sections than they were as a whole.

2. The dividend yield on the stock is competitive relative to the yield on a bond. (This was common during Reagan's first term. High interest rates drove stock prices down and dividend yields up. Once interest rates were lowered, stocks were highly attractive.

3. A business has a large cash reserve and has sustained a moderate growth rate (earnings). In such cases, the business could be expected to make a strong acquisition. (The General Electric - Radio Corporation of America Acquisition) GE acquired NBC for nothing! (NBC was free by the time GE sold off the other sections of RCA)

[RichardAWilson]

Reiterating the importance of book value. A stock can't fall below book value for too long. It has never happened for long periods on end, because it would make sense to liquidate the business (sell the company's assets) and divide the cash among the shareholders.

Book value (assets minus liabilities) is the minimum price that a stock can normally trade.

[RGacky3]

it would make sense to liquidate the business (sell the company's assets) and divide the cash among the shareholders.



It would make sense for WHOME? Who would have the power to do that?


1. The stock price has fallen below book value. In such cases, companies can be liquidated and returned to shareholders as a profit. Stock prices never fall below book value (assets minus liabilities) for too long. (Value Arbitrage) This was common during Reagan's first term. Hostile takeovers were common because of this feature (stock prices fell below book value). Companies were worth more divided into sections than they were as a whole.

2. The dividend yield on the stock is competitive relative to the yield on a bond. (This was common during Reagan's first term. High interest rates drove stock prices down and dividend yields up. Once interest rates were lowered, stocks were highly attractive.

3. A business has a large cash reserve and has sustained a moderate growth rate (earnings). In such cases, the business could be expected to make a strong acquisition. (The General Electric - Radio Corporation of America Acquisition) GE acquired NBC for nothing! (NBC was free by the time GE sold off the other sections of RCA)

Those are some ties, but imo they are very weak, being taken over or taking over a company is not a major major mover of price, it happens, but again, its not really tying the profits or capital (future of current) to the price.

Dividends perhaps, but its also a very weak tie.

I would argue that stocks act like real capital.

A large Cash reserve helps in the sense that a company can somewhat control its stock price. But these ties are very weak.

[RichardAWilson]

You're right that the correlation is more indirect than it is direct. However, there's still no justification for believing it's "fictitious capital."

During Marx's time, it was reasonable to consider stock investments as fictitious because Enron type accounting was rather common. Investors didn't know the value of a business because the directors weren't held accountable to the shareholders. Furthermore, the owners (I.e. Founders, Entrepreneurs) often owned most of the outstanding shares. In more modern times, the owners claim a much smaller portion. - Most shares are owned by institutional investors and private financiers.

Corporate accounting fraud still continues. Nonetheless, it has become much less common and investors can now value a company.

[RGacky3]

During Marx's time, it was reasonable to consider stock investments as fictitious because Enron type accounting was rather common. Investors didn't know the value of a business because the directors weren't held accountable to the shareholders. Furthermore, the owners (I.e. Founders, Entrepreneurs) often owned most of the outstanding shares. In more modern times, the owners claim a much smaller portion. - Most shares are owned by institutional investors and private financiers.


I don't think Marx's analysis was based on expecting fraudulent accounting, I think it was just based on the weaknesses of any connection, which you have to admit is very very weak.

BTW, nowerdays directors are accountable to shareholders in theory but many times not in practice.