Common (stock) sense

To know what something is worth, you need to know something about who wants it. You need to know how much money they have. You need to know if they can get it somewhere else. If people buy stocks because they hope to make money, it makes sense to think about how stocks might earn it. I’m aware of two ways: a stock can pay dividends, or the company can be sold for a capital gain. Mostly, it’s the capital gain people are after. We buy a stock today because somebody will buy it from us, for more, tomorrow – the way it worked with real estate a few years ago.

Historically, and today, the people who want stocks are, generally, people who already have lots of money. They get more money when governments make getting money easy. When they have more money, they pay more for stocks. For about a century, the accepted principle was, a stock is probably worth about fifteen years’ worth of company profits. Who knows where this came from, but it probably has something to do with interest rates and alternative investments. Anyway, for about a century, that’s what people paid, and when stocks got much pricier, they stopped buying until the price went back down.

Starting in the 1980s, when the US conquered the world, and its government started making money really easy for rich people to get, they began paying 25-, 30-, even 40- years’ worth of earnings for a company’s stock. Today, money is even easier, and the ‘whole market’ is valued at twenty-five years worth of company earnings. So if you want to buy stocks today, you need to wonder, as always, if they’re worth it.

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