Perhaps seemingly paradoxically, it is much easier to conceal obvious truths among mountains of accurate information than through deception. This is in fact a basic propaganda precept, as I understand the matter.
Since no one person can wade through all that is produced around the world every day–much less over a modern year or decade–you can always assume that what you want is out there somewhere. Quite often, though, it isn’t; or at least it is so obscure that for practical purposes it may as well not exist.
This is why I build my own analyses. I am impatient by nature, and have no desire to spend hours finding inferior versions of what I can create myself.
You can find hundreds of screaming headlines on the internet every day to do with the stock market, but very few people ask what its purpose is, and if it is optimally suited for that purpose.
The purpose of the stock market, in theory, is to capitalize companies. You reach a certain point of growth, and now you can either borrow money, issue bonds (not dealt with here), self capitalize, if you have enough money, or you can offer up ownership shares in the company in the form of stocks.
You find yourself an investment banker, who does all the legal-ey stuff, and poof, you have an Initial Public Offering. My god, that tall, regal looking CEO (or wonky uebernerd who still gets all the girls), and that impressive business plan, and men in fine suits travelling around talking the thing up, and you sell your stock well. You are selling 10,000 shares at an initial price of $15. By the time you have sold 1,000 the initial asking price has risen to $20, then $30. By the time all 10,000 are gone you have reached $50, with an average sale price of $25, netting you some $250,000.
As I understand the matter, this is all you get from this. If, as tended to happen in the dot.com boom, the stock rises to $72,000 a share because it’s rumored you might turn a profit in five years, you still only keep the initial capitalization. Once you launch your baby, it sinks and swims both because of your performance, and–importantly–because of the perception of investors of what the perception of other investors is going to be, which is only partly conditioned by–and sometimes wholly unrelated to–your actual profitability.
Now, your stock price will affect your other borrowing, it will affect the perception of your business, and of course your ego. But fundamentally it does not represent–at least as I understand the matter–an actual asset. You can’t sell it: you already have. Someone else owns it, not you.
What a stock is SUPPOSED to be is an instrument for the receipt of dividends. Have you heard of dividends? Me either. They seem to be hiding somewhere.
Theoretically, though–and this is I think how things more or less actually did operate at some point in our history–all owners in a profitable company get some share of the profit. This is obvious enough in small businesses: they run their year-end, then what is left is distributed among the owners as Christmas money for their families and themselves.
In stocks, you are supposed to get periodic payments, which are supposed to be sharing the wealth. This is what is supposed to motivate stock buying.
In theory, investors who are looking for dividends will invest primarily in profitable, stable companies. Given this, why invest in risky companies? Well, this calculus is wholly different. Venture Capitalists keep a large share of any profit made, so they are more or less betting moderate odds horses to win.
But stock investors, more often than not, will wait years to see a dividend, if ever. If the company goes belly-up, the other creditors will likely eat up whatever insignificant net worth remains.
Their motivation is the belief that other people will want to buy the stock–regardless of its underlying value, and capacity to pay dividends some day–because they can make fat money NOW. Buy at $10, sell at $20 and you doubled your money just like that. If the company goes belly up six months later, you could care less. The only reason you would care is if you still held shares in it.
The net of this logic is that the stock market has lost, if it ever had, any reason to be viewed as a rational judge of inherent value. As many have pointed out, there are many synchronizing signals that investors use, that are utterly divorced from dispassionate financial analysis. If a company lays people off, the stock goes up, since profit is certain in at least the short and medium term, as their costs have dropped. It is also certain that other people will be thinking the same thing, so you try to buy before they do, then sell after they do, making a quick profit. If, after the layoffs, their sales at some point drop as well, then you will have cashed out and moved on by then. You really don’t care if the company is well run or not. To a distressing degree, neither do they in many cases, especially if they think they can cash out their stock options before the shit hits the fan. There are laws and procedures to guard against this, but there are also ways around it.
As things stand, the stock market does not function as a useful integrator of information, as I believe it should. These supposed high speed trading computers are merely a logical extrapolation of the basic dynamic of buying low and selling high without regard to why a price may be low or high.
Now, for some, the impulse for some is to ban things they don’t want. I’m not like that. In my view the carrot is much more attractive than the stick, for all concerned.
Let me therefore propose this: for all stocks you as an individual, bank or investing group hold for one year, you get a 20% reduction in your Capital Gains tax. If you hold it three years, you get another 20%, and if you hold it five years, another 25%.
What we need is more rationality and order, and less chaos oriented around profit-making and taking that adds NOTHING to the economic opportunities and capabilities of Americans.
I had thought maybe we could ban stock selling outright, and insist on bond issues; but that is too draconian, and anti-Liberal. Moreover, if they are going to pay dividends, the stock system is much more flexible than bonds, which demand the same amount no matter how the company is doing. The goal in economic growth is to make it easy to get money to expand.
As things stand, I should note, I think most companies feel little to no need to pay very large dividends, since they know as well as everyone else that the money being made is on exchanging the stocks themselves. This is a feeling that may be wrong, but I suspect I am more right than wrong.
I had also thought that maybe we could enact a law to require all stocks to be sold at the same price, but the problem with that is that one of the reasons the IPO’s sell through is the hope of investors that the stock will rise. Absent that incentive, far less capitalization would take place.
Anyway, these are a few musings of someone watching the ping pong ball on Wall Street, and wondering yet again at how much stupidity there is in all elements of our political, social, and financial institutions. And we do better than most others.
Perhaps I could borrow from Churchill and note that America is the worst of all countries to live in, until you consider the alternatives.