I really like Karl Smith as a person. During our debate–where Karl knew he was entering the lion’s den of Mises fans–one of his slides said he was going to “teach Bob how to dance.” At the time I was so busy analyzing his arguments, I didn’t realize that was a white guy joke. Awesome.
Having said that, Karl’s recent post on Apple’s low stock price boggles my mind:
I have a theory.
On the one hand you can buy Apple stock for $375 a share and pay $7 to ScottTrade. On the other hand I also have a trash can in which you can deposit your $375, pay me $5 and I will set it on fire for you.
Clearly, I am offering the better deal as in both cases you have approximately zero probability of getting your money back and I am willing to burn it for $5 whereas you have to pay ScottTrade $7.
Now that’s not quite true. Apple’s stock price is sustained by the fact that if it goes low enough someone will buy the whole company and liquidate it. However, current investors shouldn’t be under any delusions that Apple has any plans whatsoever to provide them with a return on their investment.
As Arnold Kling might say: Thank You for your donation to the Steve Jobs Consumer Product Enrichment Fund, have a nice day.
It took me a few minutes to even understand what the heck Karl was talking about. One of his commenters spelled it out:
The gist of the joke I think is that companies are supposed to give dividends. Even tech companies. Even ones with huge market shares are supposed to provide a return and spin their assets back to their investors.
Because someday we’ll all be dead, and the company won’t exist anymore. At some point you have to return the assets or your stock is just a meaningless piece of paper. The East India Company had a huge market share also once upon a time.
I agree with this guy, that this must be what Karl is driving at. (Or, as Winston Churchill would say, this is that at which Karl must be driving.)
I have some questions then for Karl:
(1) Does his theory apply to all companies that don’t pay dividends, or just Apple?
(2) If Apple’s stock price is effectively a bubble (at least above a certain level), it’s been going on for a while, hasn’t it? I mean, people buying Apple stock right now aren’t giving their money to Apple, they’re giving it to other investors. So the question is, “Will I be able to sell this to someone else down the line, for more money than I paid?”
(3) If this is how Karl views non-dividend paying stocks, how can he support fiat money?
(4) Karl’s offhand remark about the liquidation possibility provides insight into why his explanation is silly. Suppose Apple’s management stopped reinvesting its net income into product development, and instead started buying nothing but Treasury bonds. Over time, all of Apple’s existing equipment, licenses, etc. were converted into an exponentially growing stockpile of Treasury bonds. Does Karl still think buying a claim to that pile of assets would be equivalent to burning your money in a trash can?