Yesterday, I was reading a great blog called Early Retirement Extreme. While not the premise of his article, Jacob equated investing in a fixed asset like a baseball card or art to investing in the stock market. You can read Jacob's full article where he warns savers to not invest in the stock market. While I left a comment on Jacob's site, I thought it might be fun to also respond to this issue here on my site.
I think that people too often don't understand what they are buying when they investing in company stock.
In Jacob's article he states that investing in stock is similar to buying a baseball card or art.
"This works on the same principle as baseball cards or art. They only have value as long as some greater fool is willing to buy them."
I would not characterize investing in stocks as the same thing as investing in a fixed asset, like a baseball card, art or even gold. In fact, I would never characterize buying a baseball card, art or gold an investment. Gold does not produce anything. A baseball card doesn't produce anything. Fixed assets don't make anything and therefore don't earn anything. Instead, their value is solely based on supply and demand.
When you buy company stock, you are buying a piece of a business that has the potential to EARN more money in the future. This is much different than hard assets like gold and art. A company makes money. Companies use labor, materials and ideas to create more money. This means that they make value even if some fool is not willing to buy them. Yes, the stock price might not reflect the value, but you as the part owner of the company own a percentage of the value created.
If you wanted to compare the value of a company to a hard asset like gold, you would be talking about the book value of the company. The book value of a company is the value all of the company's assets minus intangible assets and liabilities. Meaning if you were to liquidate the company right now and sell off all of its assets at auction, the book value would be the price you would receive for those assets. But, the price of company stock is rarely equal to the book value of its assets. If it is, that probably means that the market thinks that the company will not be able to generate profits and thus its value is to be derived solely from the value of its assets.
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{ 3 comments… read them below or add one }
Excellent response.
I completely agree that buying a company is very different than buying a piece of art.
Companies are income producing assets – with a periodic cash flow.
Very different than a piece of art that relies on capital appreciation alone for returns.
Great post.
Mike´s last blog ..How to Invest in the Economy: The Best Investments for Each Business Cycle
Thanks Mike. I think that this is an important concept for people to understand. This is one of the key principles of investing and economics.
You make a great point about stock being different than physical assets.
I just read ERE’s orginal article and have come to the conclusion that his post was misleading. He’s not against all stocks, just ones without dividends. Personally, I don’t know how to grow enough money to retire on without investing in stocks of some sort, so that confused me at first.
But, you make the good point that stocks and baseball cards aren’t comparable.