Hundred Hand

I was on slashdot today reading the comments to some article about the stock market, and I realized they made a very good response to the stock market post I had made earlier. Here are some of the better ones I thought would be worth sharing:

“this system rewards people who produce nothing of value, make nothing, enrich no one’s lives, do not create art, do not expand the sphere of human knowledge, and provide no meaningful service to humanity or the country.”

“If only it were so simple. Efficient allocation of capital is extremely useful. It enables all kinds of progressive development that would never occur otherwise and stock markets (and derivative markets) are the best way humanity has come up with to do it. You might as well be arguing that farmers’ markets and cattle auctions are just as useless - all they do is provide a meeting place and a means to buy and sell - they create nothing.

It should come as no surprise that the system can and is abused - that’s pretty much the case for every system man has ever come up with. But to argue that capital markets are nothing more than siphons from the poor to the rich is to throw the baby out with the bath water.”

“I subscribe that and add that the stock value concept is indeed useful but has been twisted beyond recognition. If I try to think about it with a clean sheet, I can’t find a real reason why a company that manufactures screws is worth 10% more at noon than at 9 am and then 10% less at market close.

The company in my example behaves like most companies. They are going to open the next day and sell a bit more or a bit less, manufacture about the foreseen number of screws, some employees are going to get hired, others fired, others retire… Yet the swing in value of the whole company is based around news and rumours. Traders will “discount” this or that news on stock price of our happy screw manufacturer without even bothering about the steel stock or last month’s sales. Some will buy stock and make a profit by noon if they are lucky, or loss at close if unlucky.

Now, what does all this have to do with manufacturing screws? Isn’t there much more in common with Casino Royale than with industry and people building things and making a living out of creating something of value?

I attended a conference two years ago where an accountant explained that the concept of stock worth is fatally wounded. His theory, which I also agree wholeheartedly, is that stock should benefit the stockholder with dividends, i.e., with the net value generated by the company’s activity. Not by the increase in the value of stock itself in the short term. Now there is a place for investors, he also said, who invest in stock and sell the stock. But that kind of operations ought to be separated by months or years, when actually the stock reflects the increase in the value of the company. Not by minutes, when the increase in value is nothing more than a throw of dice, even if you attach fancy and serious names to it.”

“It’s a fundamental flaw.

The incentive to do the right thing (long term investment into production) is - money. If there is another way to make the same money easier or faster, or make more money or even make more money easier and a lot faster, then a rational participant in the market will do it.

Now, the stock market is a closed system - any buck that the day trader made, someone else had to put in. The stock exchange doesn’t generate any value. So if nothing else convinces you, then ask yourself where all these short-term pure trading profits come from. If you still haven’t realized after all the bailouts: It’s you.

Can’t really blame the traders. They ran a highly profitable scam for many years, then it all blew up. They probably couldn’t believe their luck when the tax payer stepped up to cover all the losses and didn’t even stop the scam. So heck yes do they continue, of course. Who wouldn’t?”