I’ve been meaning to write this one ever since The Exhibition. It’s just too great.

Yesterday, I wrestled with the question of what Netscape is worth. It’s both easy and impossible to know. (Easy: 55 bucks a share, or whatever it’s trading hands at this instant. Impossible: what’s it really worth?) Today, I want to tell you — finally — about The Exhibition. And the butter.

A stock is worth whatever someone will pay you for it. But its “real” value, investment professionals will tell you, is the discounted value of its future stream of dividends plus the discounted value of any final liquidation. You buy shares in a company because you hope for a share in its profits.

As a practical matter, few exciting companies pay much in the way of dividends at all. And many wind up going the way of the dinosaurs long before their dividend pay-outs can justify their earlier prices. But surely the theory is right: a company should be worth today the sum of all the future payments you will get from it until it dies or is liquidated or is bought out by someone else (in which case the buy-out, 3 or 30 or 300 years from now, would be one final huge liquidating dividend).

You can’t just add up your estimate of all those payments without adjusting for the “time value of money” — a $2 dividend check 10 years from now clearly isn’t worth $2 today. You need to “discount it back” to today’s dollars. To someone who expects a 9% annual return on his money, $2 ten years from now is the same, my pocket calculator tells me, as 84 cents today.

There is much more than could be said about the mathematics of logical stock-market valuation — most of it beyond my competence to say, and none of it whatsoever applicable to the recent valuations of high-tech IPOs, or anything else you’re really interested in.

Part of the paradox is that in many ways the most exciting, valuable companies are those that never pay dividends, on the theory that to do so hurts the interests of the owners two ways: first, taxes must be paid on dividends; second, the owner will not be able to reinvest the dividend with nearly the success that management could if, instead of paying out the dividend, it retained the profit itself (“retained earnings,” is the accountant’s phrase). Better, therefore, to keep reinvesting all profits and acquiring more and more earning power — even if the earnings are never passed on to the owners.

A lot of this has to do with “faith” and “trust,” just as dollar bills themselves merely represent units of “faith.” The bills themselves are just scraps of paper. You can’t eat them; stitched together they’d keep you only a little bit warm. But we take it on faith that everyone else will accept their value — and so we do, too.

So I don’t know what stocks are worth, though my greed and fright glands often seem to think THEY know, and are sometimes right. (The greed gland is located in the pit of the stomach, just behind the appetitum. The fear gland is located in the hindquarters, and makes you run like hell when scared.)

What, then, would you pay for 400 pounds of butter?

Here it is the end of my comment, time for Seinfeld (I’m sorry, but some things take precedence), so I have to ask you to come back tomorrow to hear about The Exhibit. And the butter.

Tomorrow: The Butter. (Really.)


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