Asset price valuation models are becoming memes.
Here’s why & how it matters to you as an investor 👇
First, some label definitions so we’re on the same page:
An “asset” is any instrument that transfers ownership of value across time & space.
For a thing to be an asset it needs to satisfy at least 3 basic conditions:
1/ limited supply
2/ durability
3/ social agreement that the thing can be used to represent value
Most fiat currencies, stocks, bonds, real estate satisfy these conditions to various extent through various means, thus are counted as assets.
Many fungible & non-fungible crypto tokens can also be counted as assets, depending on how well they satisfy these 3 conditions.
Condition #3 is crucial— an asset needs some type of social agreement to have value. The social agreement may or may not be based on underlining utility of the asset (as we’ll talk abt in a sec, increasingly it’s NOT).
Ultimately these social agreements are memes— our collective truth or delusion, depending on your perspective.
Take stocks. A key social agreement that supports stock prices is (roughly):
stock price Ă—Â total shares = value of the company
Stock price valuation models all try to estimate the right-hand side of this equation— using discounted cash flow, asset & liability calculation, network effect estimates… you name it— while taking the equation as a given.
Few pause to consider the fact that this equation is in fact a make-believe, i.e. meme.
In old days when companies still paid dividends, the equation was more real, cuz if a company did well, it had tangible benefits to shareholders in the form of more profits paid out as dividends.
No so much anymore. Dividend payout ratio— percentage of firms’ earnings that are paid as dividends— of S&P has dropped by 20 pp since 1950s.
Dividend yield— dividend as percent of stock price— also dropped significantly.
Is this because firms are doing poorly? Not at all. Firm profits (as percent of total economic pie) have gone up over time.
The decoupling btw firm performance & shareholder benefit is esp acute for tech companies. Dividend payout rate of public IT companies is < 15%. A company like Amazon has never paid a cent in its ~30 yrs of existence.
If you own 1 share of AMZN stock, you don’t directly get any utility out of Amazon growth. Whether the company is profitable or not is irrelevant to your income. Your shared company “ownership” is in name only.
Amazon stock (or most growth stocks) is no different from "useless governance token".
— Tascha (@TaschaLabs) January 23, 2022
Amazon doesn't give dividend. Being a share "owner" is in name only, w/ no benefit except hoping other people'll bet on it too so price go up.
All risk asset market valuation is mostly a meme
You say, but that’s cuz growth companies are better off reinvesting earnings to grow more. Benefits to shareholders will be from stock price going up.
Sure. But that doesn’t negate the fact that the real reason $AMZN price goes up when Amazon company does well is b/c we’re all buying into the collective meme that says:
stock price Ă— total shares = value of the company
even though the condition for this equation to hold has become increasingly tenuous b/c of companies like Amazon.
In other words, new generation of public companies is actively violating the collective make-believe about stock valuation while taking advantage of the same make-believe.
In other, other words, your gain from AMZN stock doesn’t come from the company, but is entirely from other mkt participants who buy into the same valuation meme & are thus willing to buy shares from you at higher price when the company does well.
Your stock price wouldn’t go up but for this meme, despite the fact that it’s increasingly detached from reality.
Imagine the alternative scenario where instead of the pretense of company “ownership” that stocks give, we simply have an index that mirrors Amazon growth for people to bet on (such indices already exist actually).
This is no different from sports betting or horse race betting. Except your opponents are not people who bet on other horses in the same race but future buyers & sellers of the same stock.
Any gain you may have comes from other mkt participants, who either bet in opposite direction or are willing to bet even higher price than you w/ hope that the index goes up even more so they, too, can sell higher.
It’s easy to see that the rule of such an index is entirely arbitrary. And yet it’ll work just as well as any growth stock as long as players all accept the same meme.
Why is this important to you as an investor?
(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter for updates.)
B/c it’s always useful to know the nature of the game you’re playing, so you understand how the game rules may change in different circumstances, rather than blindly following common sense, i.e. mega meme, w/o thinking.
Take the useless “governance tokens” in DeFi. Those don’t even pretend to be ownership shares & offer no yields or dividends. People joke abt them often & yet prices are not zero. Why?
B/c they’re inheriting the same social agreement as in growth stocks w/ no tangible benefits to shareholders. As long as mkt participants all agree on the arbitrary meme that “token price × total supply = value of the protocol”, the token’d behave similarly to stocks.
And same as before, in what’s essentially a horse betting game, your gains come from other mkt participants rather than from economic values generated by the protocol itself.
So when you bet on governance tokens w/o utility, you’re implicitly betting that our collective valuation meme will persist, even though it has little basis in reality.
Powerful memes, reality based or not, can indeed persist for long time & serve useful function of maintaining social (or market) order. I don’t see anything wrong w/ that.
Many communities around world still believe that God is an angry old man who leaves no misdeeds unpunished, yet somehow loves you. You may question the truth of such meme. But you can’t deny it does a good job holding many a society together.
Still, it seems reasonable to assume that valuation memes w/ some basis in reality will tend to be more enduring than those w/o.
If the relationship of “token price × total supply = value of the protocol” is to become something more robust than a figment of collective imagination, devs should indeed do something to create active linkage btw left-hand side & right-hand side of the equation.
It could take the form of profit sharing w/ token holders similar to dividends, but it doesn’t have to. In fact the easiest way could be to program an emission/burn schedule that reflects how well the project is doing.
Select a relevant protocol KPI (key performance indicator)– e.g. TVL, total txns processed, total relays performed, depending on the application— pick a frequency of measurement & tie that to available token supply.
Any lie or make-belief is more powerful & enduring when there’s an element of truth in it. Asset valuation meme is no exception.
16 Comments
Great insights as always tascha! Its an interesting subject. Especially because we not only share the same make-believes but also evolve it by anticipating behaviour based on this make-believe. We are predicting reactions as a consequence of changes in the equation. Thereby creating further make-believes.
One reasons that dividend payout ratios have gone down is that companies now return more capital to shareholders through stock buybacks. The effect is the same for both dividends and buybacks: Company takes cash out of the corporate pocket and puts it into the shareholders’ pockets. Buybacks have serious tax advantages, in that the shareholders who sell into the buyback are only taxed on their capital gains, if any. Those who don’t sell into the buyback now own a bigger share of the company, which triggers no immediate tax. Companies like Amazon won’t want to pay dividends until the founder moves on, because any dividend from Amazon would result in a big tax bill for Mr. Bezos.
Bingo! The dividend yield is lower b/c its more efficient to do stock buybacks. Including stock buybacks and dividend yield could make the first chart look very different.
Check the history of AMZN shares outstanding and you’ll get the answer for this. Buybacks are drop in bucket compared to how busy the company has been watering down its shares in past 30 yrs.
You’re getting very close to my personal model of money, which is a collective hallucination, based on trust that a certain action will have predictable results over time. You can apply this, to a certain extent, to stocks too, which aren’t as fungible as money, but are based on the same trust that a certain set of interactions (selling the stock, for instance) will have the same degree of predictability over time.
I usually say it very shortly like this: all the money in the world is in other people’s pockets.
Great insights. Yes our whole society is based on trust in some form or fashion, Including all of our financial markets. Trust has eroded greatly recently and hence we are now seeing it spill over to every facet of our life including the financial markets. This really is the great re-set to the new world we will all soon observe as our new reality and paradigm shift.
Awesome post Tascha!
Nice insight and thanks much for your newsletters.
To me (a newbie in crypto market), your analysis seems very similar to the total shareholder return (TSR), factoring capital gains and dividends, while eliminating dividends in this comparison of AMZN and Governance Token.
I agree with your valuation meme comparing these two different assets and your suggestion for a different substitute for dividends of the Tokens.
From an old TradFi guy point of view, it seems the perceptions and price actions of these two assets are being overly exaggerated due to its categorization class. There could also be many other different factors to the volatility, but overall the market and participants seems to enjoy it. However, we ought to find some right and acceptable analytics lowering the market volatility in order to attract more capital inflows into this market that is essential for the future growth.
The physical reality is a meme.
Shhhh don’t let the others know this secret! I need them to believe this meme to have exit liquidity!
You’re killing it Tasha!
I just wish you were more consistent with your Twitter commentary. One day you say that you don’t invest in high risk alts, then a few weeks later your promoting some risky GameFi coin on Twitter and posting short-term mooning price charts of said coin.
Be conscious that since your a crypto influencer now (whether you admit to it or not), newbies who don’t know any better may buy what you promote in inappropriate proportions.
1. I never said I didn’t invest in ‘alts’. Just the opposite– I invest mostly in alts. I said I don’t invest in things that don’t have tractions. That has always been the case and will remain so. End of day all crypto is ‘high risk’. Exactly how high depends on individuals’ situation which differs for everyone. I may be wrong many a time but nothing I say is inconsistent from where I sit.
2. 45% of my readers have graduate degrees & 95% are college educated. People are smart & can make their own judgement. They read this website to expand their intelligence, not to have their intelligence insulted or babysitted.
3. I do not live to be what other people expect me to be & certainly not gonna start now.
4. Nothing I post is financial advice as has been repeated many many times.
“If the relationship of “token price Ă— total supply = value of the protocol” is to become something more robust than a figment of co”If the relationship of “token price Ă— total supply = value of the protocol” is to become something more robust than a figment of collective imagination, devs should indeed do something to create active linkage btw left-hand side & right-hand side of the equation.”
>>>>
No doubt you’re aware but This is a thing a lot of tokens do… Holders get reflections of tokens proportional to how many tokens they’re holding. Crazy meme coins do this but so do more serious outfits like HEDGE Finance on BSC. llective imagination, devs should indeed do something to create active linkage btw left-hand side & right-hand side of the equation.”
>>>>
No doubt you’re aware but This is a thing a lot of tokens do… Holders get reflections of tokens proportional to how many tokens they’re holding. Crazy meme coins do this but so do more serious outfits like HEDGE Finance on BSC.
Re guy who left the last post about Tasha being more consistent, you, and by that I mean ppl, need to stop being lazy and take responsible for your own thinking. Twitter should be used for some research or to communicate or to check sentiment in the street, or whatever else, but not trading ideas based on what these people say. Know the risk. I mean this is all super risky. You see tascha do the diamon nft thing and think that’s easy or not risky? Instead of urging profiles you follow to be “conscious” you should be urging twitter users to be more conscious.
On that note, your post is interesting to me personally bc ten years ago when I did not trade and was idealistic and anti financial markets and convinced it was all a fraud (post 2009 when M2 went up) I saw the stock market as literally a worthless shell. They’re trading shares which are inherently worthless. I didn’t get involved and missed much of the run up after that. Whatever about that but now, reading your post it’s weird to think how right I was, and wrong too. Thanks.
I suggest leraning about the concept of “Share Holder Yield”, which is “dividend yield” + “net buyback yield”.
Here in this artical, we assume “dividend yield” is 0. But that doesn’t mean “net buyback yield” is 0.
I meant to refer to the youtube video.
Why Living Off Dividends ISN’T What Most People Think… | Dividend Investing 2022
by Safeguard Wealth Management