Sunday, October 12, 2008

The Problem with the sharemarket

Congrats if you manage to read the whole post I suspect it's not the easiest to do so, especially considering I didn't bother proof reading it, so effectively what your getting is a stream of thoughts, anyway with out further ado onto the actual post.

Something rather different.

I must say I'm finding the current financial crisis rather interesting and long over due. The modern sharemarkets to me have always seemed to be a crazy system, that does not create wealth but simply moves it from the unlucky and less intelligent members of Society to more intelligent and lucky members. It seems to rely on a couple of fundamental assumptions that are no longer valid, and is effectively a highly risky form of gambling that can have insanely far reaching consequences. As I see it the fundamental role of shares was to raise capital for a company allowing them to expand and grow there business, with the underlying promise that when the business had grown the company would either purchase the shares back at a somewhat high price than they issued them or offer dividends returning a small portion of there increased profit back to those who funded it. The sharemarket was then a way for those who had initial invested to pass there investments onto other groups if they needed access to the money they invested. The modern sharemarket seems entirely different though from the traditional, first companies issue ridiculous numbers of shares which they have no hope of ever buying back. These shares are then traded back and forth as traders speculate that they will be able to make money not off the company via it buying back the shares or issuing dividends but by selling those shares to people with less understanding who want to buy in to the "sharemarket" and there favorite companies, or simply the company of the moment. This leads to shares ending up with insanely inflated values which have no relationship to the companies actual ability to make a profit or distribute it to its share holders. This effectively raises the price of the shares to a point where no company can afford to buy back any significant number of it's shares, effectively ruling out one of the principle methods of a company delivering money to its shareholders. Dividends are also unpopular on as 10cents a share is nothing when you've just bought a thousand shares at a cost of $100,000 also it appears the company is frittering away it's profit rather than reinvesting it in it's self. The shareholder has just spent $100,000 on shares they're not ever going to get the money back from dividends and the company can't buy them back, so the only source of profit they can make is to sell the shares onto some other chap, to do this they want the share value to rise so they encourage the company to not pay a dividend and reinvest the money in it's self to increase it's future profit. Which will in turn increase the apparent value of there shares and allow them to offload them to some other poor sucker who can throw his money away. This effectively leads to a continuous cycle of share prices increasing.

The only way to make money off this cycle is to grab a share then sell it off when it's price increases enough but before it drops or crashes. Because when it eventually does some one has to be holding the can and as long as it's not you why would you care? After all doesn't matter to you that some chap spends his lifesavings to buy the shares off you thinking it's an investment only to have the value crash a week latter reducing his $110,000 to nothing. After all he knew the risk didn't he and the truth that the sharemarkets are a 'zero sum' game and a gamble that the majority do not understand and lose in.

Off course this doesn't even take into account things like Short selling, or naked short selling which are used by the rich and savvy to deliberately distort the market to make a quick profit. Or the whole securities market buying and selling things like mortgages.

As a quick note to those who might think that its fine enough to say all this but you've got nothing in it so shut up. I am some what effected by it due to the fact that a noticeable percentage (15% all up) of my salary goes into a superannuation scheme that has some exposure to the sharemarket. Though I did chose a cash heavy scheme based on my opinion of the sharemarket, and that I have no desire to profit of people who fail to realise that the sharemarket isn't an investment it's a gamble that they going to loss when going up against people who do it for a living!

Oh and I am aware of thing like securities, insurance, government bonds, international cash, gold, coffee, oil and food options and futures but haven't commented on then because I either like them even less than the sharemarket or don't know enough about them or what they're currently doing.

Any way what are your thoughts about the sharemarket and how are you finding this current "crisis" (or overdue price corrective action ;-P).


Matt said...

It seems to me that the economy has turned out like any useful abstraction or metaphor does – you forget that it's just an abstraction, and that there's an underlying reality, and the abstraction becomes a thing in itself.

The economy has done this; money started as representative of goods and services to enable easier trade, but it's now nothing more than numbers in computers, and in many ways there is no connection at all between the size of those numbers and how much wealth is actually around.

All that's happening now is that the abstraction is breaking down. You can see how the people most affected are the ones most participating in the abstraction, while those who have stuck mainly with the realities underneath are mostly okay. (eg. Banks and investment funds are screwed, people who actually own their houses are fine.)

EONsim said...

Yeah that seems to be an accurate way to put it.