There’s less disagreement than you think here. Future net earnings enter the equation as future dividends (appropriately discounted) or share buybacks (driving up farther-future dividends and per-share liquidation value). I didn’t specify that assets on liquidation had to be tangible; trademarks and the like are valuable (both because they improve the business as it operates and because they can be sold on liquidation).
If earnings are reinvested in the company, that’s fine. The investments will be profitable or not; profitable investments will result in even more earnings. The cycle can continue until either (1) management decides that it has no further opportunity for reinvestment, and returns the now-compounded earnings to shareholders as dividends, or (2) investments are made that are unprofitable, and the money is wasted. Option 2 is a surprisingly popular choice.
In any case, a stock that has no dividends, no liquidation value, and no prospect of either of those facts ever changing is worthless. You may be able to convice a greater fool to buy it, but there’s no actual wealth attached to the stock.
Jeremy and Doug,
There’s less disagreement than you think here. Future net earnings enter the equation as future dividends (appropriately discounted) or share buybacks (driving up farther-future dividends and per-share liquidation value). I didn’t specify that assets on liquidation had to be tangible; trademarks and the like are valuable (both because they improve the business as it operates and because they can be sold on liquidation).
If earnings are reinvested in the company, that’s fine. The investments will be profitable or not; profitable investments will result in even more earnings. The cycle can continue until either (1) management decides that it has no further opportunity for reinvestment, and returns the now-compounded earnings to shareholders as dividends, or (2) investments are made that are unprofitable, and the money is wasted. Option 2 is a surprisingly popular choice.
In any case, a stock that has no dividends, no liquidation value, and no prospect of either of those facts ever changing is worthless. You may be able to convice a greater fool to buy it, but there’s no actual wealth attached to the stock.