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Why do we want share prices to go up?

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Tysonboss1

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Wouldn't all us so called Investors be far better off if stock prices fell by 10%pa than if they increased by 10%pa?

I often come across posts from investors cheering because some stock that they have $5000 in has doubled in value, and they seem to think that this has made them richer, and it has. However a rising stock prices just pushes you further away from financel freedom.

Consider this analogy,

You are a 20 year old investor who has found you can buy inner city carparks for $10,000 each and and lease them for $1,000per year. You realise that if you bought 100 carparks you could retire on $100k / year.

You think about it and realise that by regularly investing part of your wage + all rent received you could purchase 100 carparks in 25 years. So you set about buying as many car parks as you can. Two years into you plan you have 2 carparks worth $20,000 and can see how the compounded growth of reinvesting the rent will speed up your return over the years.

Then suddenly somthing strange happened, There was stories all over the media about wealth to be had in the car park market, and other investors rushed in doubling the price of car parks to $20,000 each.

At first you are glad, your net worth just doubled from $20,000 to $40,000 and it seems you are richer than ever, you happily delight your friends with stories of you quick fortune.

But you soon relise that the carparks still only provide a dividend of $1000pa, and you still have 98 more carparks to buy at the new price of $20,000 each till you can retire on the earnings, your dream of owning 100 by age 45 is now impossible.

Surly it would be much better for if the price of carpark got lower and lower rather than higher and higher. Should they drop to $5000 each you should be laughing cause it just knocked 12years off your investment plan

The lower the price of the investment becomes the faster you will be able to own enough to retire on.
 
Why do you think the world should stand still until you get your fill? Asset values are constantly changing due to many factors and the least of which being waiting for you to get your fill.
 
I feel exactly the same way about housing. Ulitmately, out of control house prices will have a negative impact on society.

Would be very happy to live off rent and give up the capital gains.

Our Australian love affair with property capital gains is irrational - but as Ross Gittins says, the economy is irrational.

Brad
 
I guess it depends what your investing for. If your investing longer term for yeild then you dont really want prices to go up until you have got as much as you want/need.

The other thing is that it is likely that yeild will rise at least a little over time. But i can see your point.
 
Wysiwyg said:
Why do you think the world should stand still until you get your fill?
Click to expand...

I don't want the world to stand still, I am simply saying that putting total focus on capital gains is some what short sighted for most people.

Alot of investors who post on this forum often seem upset if the share price of the company they have invested in goes no where for 12 months.

It seems most people put complete focus on share price, and judge the achievements of a company by it's share price. If a person Buys X stock on monday for $1 and by friday it's 90c, It's easy for the person to get upset and disheartened even though the underlying company may still be operating strongly.

You can often see posts where people are complaining that stocks haven't moved after good annoucements, I see this as a good thing.

I know it's fun to see the stock price of your company increase in value, But just think about whether you own enough of the stock to celebrate the rise. And if a stock price falls, Don't let that discourage you from your investment plan, it may be a blessing in disguise.

The thing with capital gains is you can only access the value by selling the farm.
 
prawn_86 said:
The other thing is that it is likely that yeild will rise at least a little over time. .
Click to expand...

Yes, using the carpark example, If the annual rent rose to $2000. then you would probally still be happy paying $20,000.

But a stagnating or slow moving share price would be better, Say if the rent rose to $2000 but the prices only rose to $15,000.
 
If the price of the car parks goes down, then there would be more people wanting to get in and buy them, so competition and demand for what is available increases.

The guys that build car parks will see the added demand as a signal to build more car parks which meets the damand but devalues the other car parks even further. So to maintain your original value you would have to add to your portfolio of car parks.

No matter how many car parks you buy at the lower price, you will never beat the guy who started buying at the lower price. His expectation on income can be lower since his cost was lower, so the return on your more expensive car parks will never recover.
 
R: I think your story is not logical. You cant be 100% certain that more people will buy when price goes down. When price is a little lower, you might be right. But if price drops substantially due to external circumstances like lack of credit, then you wont find buyers and demand will be very poor.

A good time to buy for the savvy investor though.
 
i think the arbitrary goal of securing 100 carparks (ignoring price, yield) is a bad idea

If prices drop some more, you will be able to secure $98 carparks at a cost of $5 each. They might continue their decline to a value of $1 at retirement age because cars are no longer a viable means of transport (fuel costs skyrocketing, alternative fuel vehicles, flying cars, etc)

wouldn't the more appropriate goal be to build a portfolio of $XXX that will return $XXX per annum at retirement age that will allow you to live comfortably?
 
But isn't the flaw in your argument that the value of the shares or the car parks is primarily based on the net present value of the income stream from the car parks or shares (rent or dividends in these cases). I know there are other factors like risk, volatility, what stage of development the company is in, alternative investments etc., but it is the potential income stream that determines value. This at least is the textbook explanation of value.

So if share prices were to gradually fall over time, it would primarily be because the dividends from those shares are falling in value. You can't have your cake and eat it.
 

That.

If you'd only make $1000 a year on the now-$20000 car park, you wouldn't buy it. You'd get an investment that payed more than 5%. Which would drive the price of the car park back down until people were willing to buy again.

Welcome to supply and demand.

But if, as the price of the carpark went up, the return also went up - so when it was $20000 you'd make $2000 a year - then damn right you'd want the prices to go up. Not only would the return on new car parks be the same as it ever was (10% in this example), but also the value of the car parks you bought originally would be going up, AND you'd be hopeful that the price / return on the ones you're getting now would go up in time, too.

That's why we want share prices to go up. Not only do returns tend to remain at a similar percentage of the cost of new shares, but we ALSO make money from the increase in value, AND gain increasing benefits from shares held longer term.

Increase in value + increase in return > increase in return alone.

Silly question. :
 

Car Parks was a metaphor for the share market in general.

I think you goal should be to build a portfolio of $X value to generate $X income, However what I am saying is the higher the price climbs the lower the %yield so the more you have to have invested.
 
bellenuit said:
But isn't the flaw in your argument that the value of the shares or the car parks is primarily based on the net present value of the income stream from the car parks or shares (rent or dividends in these cases).
Click to expand...

No, not really. A share prices more due to the number of shares being sold compared to the number of buyers, the more buyers the higher the price.

and the number of buyers and sellers fluctuates for many reasons, there is no formula that says X stock pays Y dividend so is worth Z.
 

Even if the income went to $2000 you shouldn't want the price to go up, You would "accept" the higher price because it has been offset by higher income so the end result is the same 10% return. But you would be much better off if it didn't go up and you received 20% return.
 
I wouldn't say number of buyers vs sellers is the thing that decides price. It doesn't take much to find a company where there are many more buyers than sellers but the price still moves down during the day. Some just want to sell, some just want to buy so they go at the market rate. Some think it has a particular value and only buy/sell at that price.
 
What started my whole thought process on this topic was the recent share market crashed caused by the GFC.

At the darkest days of the market crash I was picking up stocks on ultra high dividend yeilds.

at one stocks low I was getting a yeild of 60%, Thats $600/year for every $1000 I put in. Now at the time I thought thats great yeild, but my main focus was on the inevitable recovery in the share price and the capital gains that would bring.

Now the share price has recovered and the company is back to trading at a yeild of 10%, So I am happy with the massive capital gain.

How ever had the company not recovered in share price I would have been far better off through the yield.

I mean a compounded rate of 60% for 20 years is better than a one of 600% return followed by a 10% compounded rate for 20 years.
 

I mean the number of shares not the number of actual people.

eg, if there are 10 buyers wanting to buy 1000 shares each but 1 guy wanting to dump 1,000,000 shares there will be downward pressure and the reverse is also true when buys outweigh the sells.

offcourse it still comes down to people taking the low or high bids for it to move in either direction.
 
You're assuming that yield would be sustainable. I'd say that's questionable if the share price isn't going up.

A company paying out a yield of 60% makes no sense. Why wouldn't they be putting most of that into growing the business?

Re another of your points about yield decreasing as your capital gain increases, this is going to be relevant or not depending on your overall financial situation. e.g. if you are deriving your living from your investments you will decide how much p.a. you need, then decide whether you will obtain this from expected capital growth and/or dividend and franking income.

So, say you want just $50k p.a. and you have decided to get this from dividends and franking credits. As long as these are sustainable from the company's point of view, that level of income won't change just because the SP rises and gives you a capital gain. Remember that dividends are decided on the basis of cents per share, not % of the SP. The latter is simply a convenient way of assessing the yield factor.
 
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