Rob’s comments are in italicsDerek’s comments are in normal font
Initial Comments on the US Election
The American election results on November 8th produced a Trump landslide. Many people tried to convince themselves it was neck and neck.
Not to anyone paying attention - I had it fairly nailed on that it was quite likely.
The significance for our discussion lies in the effect this outcome has had on various share prices. The most obvious impact will emerge over the next few months regarding pharmaceutical companies. Robert Kennedy's suggested appointment as Trump's Minister for Health, combined with his declared war on regulatory agencies, their industry capture, the harm from vaccines - this could puncture an enormous bubble.
That was the main one that came to mind. Bitcoin prices notably rose quite a lot after the election results. Bitcoiners were fairly bullish about the outcome. We'll see what comes next now. Judge them by what they do, not what they say.
Kennedy's presence in the government will make things interesting. The media's huge onslaught against him seems inevitable.
Very interesting.
It will be intriguing to see whether they can sustain that opposition, particularly if he gains wider credibility or makes progress with his stated aims. Simply bringing these issues into open public debate marks a huge step forward compared with the manipulated, suppressed public narrative. This manipulation has existed since the invention of newspapers to some degree.
In the past, more independent voices existed across different publications. Now they've been amalgamated into monopolistic conglomerates. They've continued what worked well for them, unable to think differently. We're experiencing some kind of era change. The next five to ten years will prove astonishingly interesting.
Let's go back to the issue of share prices then…
The Original Purpose of Share Ownership
Share ownership's original purpose emerged during the Industrial Revolution. Starting an enterprise then - perhaps a cotton spinning factory, steam engine production, railway line, coal mine or steelworks - required substantial capital. This meant literal capital: equipment, land, buildings, rolling stock, rails - everything needed for operation. The concept addressed two issues: these ventures typically exceeded individual funding capacity, people wanted opportunities without risking total ruin if the venture failed. Their liability remained limited to their shareholding investment.
The expectation was that profitable businesses would share their profits. Historically, as previously discussed regarding government bonds, the baseline interest for a very safe investment yielded two and a half percent. People were satisfied if £10,000 yielded £250 annually without concern. This represented substantial income in the early 19th century, providing a comfortable living.
Investing in an enterprise with returns from profits involved less certainty. Successful ventures typically yielded higher returns on investments, perhaps double the safe government bond rate. A dividend of roughly 5% of the investment seemed normal. Another general benchmark suggested that whatever the operational setup cost - land, factory, machinery, initial stock - should yield a 10% return. This meant 5% distribution to shareholders, leaving 5% for capital maintenance, machinery replacement, or operational expansion.
Present-day stock exchange shares differ, as the initial shareholding money's use for company infrastructure lies in the past. Investors tap into income streams derived from enterprise properties and profits. Many stock exchange shares yield significantly less than 5% dividend. Investors seek share price rises for returns. These expectations have been well fulfilled over the past 70 years, raising questions about sustainability and real value regarding money's purchasing power.
Looking at Apple’s Early Years
Apple Computer's early years provide an excellent illustration. Their Apple II, the first successful desktop computer, surpassed several rival machines. Once established beyond technological enthusiasts, VisiCalc spreadsheet software transformed it into a useful business tool.
VisiCalc represented the spreadsheet prototype, preceding Microsoft Excel. Despite Excel's sophistication running on vastly more powerful computers, VisiCalc satisfied perhaps 80% of current Excel uses. This basic spreadsheet managed rows, columns, numbers, labels, and formulae. It supported management tasks, stock lists, small business accounts, and future business projections.
Apple maintained solid gross profit margins on component costs against sales prices. They reinvested profits into manufacturing, marketing, and distribution expansion. This strategy yielded approximately 700% annual growth for several years, with turnover doubling quarterly. Six-month periods saw fourfold increases, reaching eightfold annual growth.
Richard Koch would describe that as a 'Star Business'.
That would be a star business by any standards!
Two Principle Statistics
In a business like this, early investors would not seek immediate profit distribution as dividends. Their interests were better served through profit reinvestment into business expansion. Tech firms typically avoid declaring dividends for many years, reinvesting profits into business growth with shareholder approval.
Two principal statistics help evaluate shares: dividend yield and price-to-earnings ratio. For dividend income seekers, yield proves significant. The simpler business models historically suggested avoiding yields below 5%, whilst higher yields indicated good investments, barring warning signs.
Long-term shareholders focused on growth potential examine the price-to-earnings ratio. This represents total profits, accounting for interest payments and tax obligations. Available profits amounting to one-tenth of share price yearly equals 10% investment earnings. These earnings might be fully distributed to shareholders or completely reinvested for expansion.
Nineteenth-century investors considered shares reasonably priced at ten times current earnings. Modern stock markets show higher price-to-earnings ratios. This historical figure compares last reported profits against current share prices. Apple Computer's scenario, projecting eightfold profit increases, rationally justified paying up to ten times anticipated earnings - an 80 price-to-earnings ratio betting on future performance.
Yes, because you're betting on the future really.
Contemporary tech stocks, particularly on American exchanges, dominate Western economic activity. Similar principles apply to the British Stock Exchange. Half-dozen tech firms' enormous nominal capital governs aggregated performance. Their faltering would significantly impact overall market performance.
Amazon, Meta, Microsoft maintain 25-35 price-to-earnings ratios, suggesting doubled or tripled profit projections. Nvidia, producing graphics cards and high-end mathematical computing hardware, demonstrates enormous sales growth, maintaining a 65 price-to-earnings ratio - approaching early Apple Computer growth levels.
Scale differences matter. Companies previously growing from £10 million to £100 million revenue yearly eventually plateau. Modern corporations worth trillions, like Apple's £3 trillion paper value, raise questions about sales justifying 60 times earnings share prices.
Early Apple expanded profits through increased machine sales, peripheral additions, and software sales - genuine growth opportunities. Modern profit expansion often relies on price gouging and planned obsolescence, forcing upgrades as previous models become unusable.
Workforce pressures intensify, demanding increased output from fewer personnel under harsher conditions. Companies often relocate to regions with lenient labour protection laws, offering minimal benefits.
Fiat currencies' declining purchasing power continues, likely to accelerate. Paper nominal gains in share prices partially offset currency inflation. Examining high-tech companies' extreme price-to-earnings ratios against real growth potential for new business activity raises questions about future revaluation.
Additionally, crowd dynamics significantly influence rising stock markets through herd behaviour and fear of missing out.
There's a feedback loop in play there.
Yes indeed, a positive feedback loop exists between rising prices and increased willingness to pay more, regardless of underlying rationality. This overview helps evaluate potential direct or indirect investments sceptically.
Comparing to Google Ads Click Prices
It feels like some prices reflect adding two plus two plus two to reach 222. This continues for years, creating shifting baseline syndrome where it becomes the new normal. We both encountered this working with Google ads. Google ads remain their primary revenue source. Share price movements seemingly influence click pricing adjustments.
Going back to the early 2000s, the price per click seemed fair or underpriced. Now it appears overpriced, particularly challenging for small businesses. Share price concerns likely drive this trend.
Precisely. Share buybacks significantly affect prices. Google recently demonstrated this after reporting enormous profits. They laid off numerous technical staff - concerning for a tech company - using profits for share buybacks rather than staff retention or company expansion. This practice, historically illegal in Britain, now represents accepted business practice.
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