Re: Lyle's Laws

Hal Finney (
Thu, 2 Jan 1997 09:49:55 -0800

From: Lyle Burkhead <>
> Anyway I was kidding about the stock market going up exponentially.
> This was supposed to be an absurd fantasy to get the new year off to a
> humorous start.

My mailer somehow deleted about 50 messages yesterday, so I never saw
Lyle's humorous message. But at the risk of redundancy I'll repeat an
argument I made here several years ago for why we should see a stock
market explosion.

The question is, what is the price a stock will have in a market where all
participants are rational? Economists have many theories for everything,
of course, but one of the most accepted theories for stock price is
based on "discounted future returns".

The idea is that the benefit of stock ownership comes down to dividends.
This may seem surprising today when we think of spectacularly performing
IPO's where stock holders make a lot of money even though the prospects
for dividends are pretty uncertain. The theory is that ultimately
these companies are expected to be producing dividends, big dividends,
because of their rapid growth rates. Eventually they will move into the
"cash cow" phase of their growth cycle and exploit their market dominance
to produce huge payoffs for investors.

The problem then is that most of the dividends which ownership of a given
stock will provide are off in the future (even if it is paying dividends
now). So what you need to do is to discount the future income from the
stock by your personal interest rate, which will generally be about the
same as current market rates. Getting $100 next year is worth less to you
than getting $100 this year, perhaps by a few percent.

You then form an infinite sum, adding each estimated future dividend
multiplied by the discount rate appropriate for that distance in the
future. This gives you the total discounted future return for the stock,
and that, according to this model, would be the stock's value for you.
Average this over all market participants and you get the stock price.

Now consider how this model works as we approach an era where industrial
production grows explosively, due to nanotech, or AI, or self-reproducing
cheap robots, or some other breakthrough. This can cause returns from the
stock to begin increasing at a rapid rate, even faster than the discount
factor reduces them. The result could be that the infinite sum above
diverges! The stock will in fact, today, have an infinite value to you.

Right now not many people would believe this reasoning. But as we
approach a singularity era, and more and more people start to sense
"great things just beyond the horizon", it will become more accepted that
owning productive resources is going to be the ticket to future wealth
beyond imagining. Stocks and other productive assets will become
overwhelmingly attractive. We will see a sudden transition to a regime
where everyone expends all other resources to buy stocks. The result
would be a one-time transition, an explosion in stock prices.

This would not be a conventional speculative bubble, where people invest
just to get temporary gains from the ongoing price rises, but rather a
long-term transition. These are "buy and hold" investors, putting every
spare penny into stocks. And assuming the productivity explosion occurs
as expected, all these people could end up being very happy with their

I would expect the financial explosion to occur a few years to perhaps a
few decades before the productivity explosion, depending on how farsighted
investors are. Obviously political factors will be relevant too; if stocks
are nationalized then ownership will be irrelevant. But the huge returns
possible can tolerate even a considerable degree of uncertainty in how
likely they are to occur.

So actually a stock market explosion is not such a far fetched
possibility. I doubt that we'll see it next year, though! But keep it
in mind when you make your own financial plans.