Edmund Storms wrote:
While I agree with much of what you say, Richard, I don't think stock
trading needs to be gambling. It is too easy to evaluate reality and
choose stocks that always make money, at least for awhile. Its rather
like counting cards in 21, which moves the odds away from chance.
However, in both cases, the count of the cards needs to be faithfully
known and used. Most investors loose the count, so to speak. When this
happens, chance takes over and the house (the big stock traders)
always wins.
In general I can't disagree with what you're saying, Ed, save for one
thing: The consistent winners are not the "big stock traders", they're
the brokers.
Traders, who attempt to make money by trading a stock or commodity, all
are taking on some risk. Brokers, on the other hand, are not. On every
trade, some broker somewhere wins, because the broker gets a fee whether
or not either party makes money on the trade. In a very similar vein,
most trades are actually made on behalf of mutual funds of one sort or
another (hedge funds are just another kind of mutual fund) and the
mutual fund managers skim off a "fee" amounting to something on the
order of 1% of the total wealth of the fund every year; for a fund with
billions invested in it, that's a lot of money. Mutual fund managers
can't lose, even if they mis-manage the fund so badly that it goes bust;
their income has little or no dependence on their ability to pick
"winning" stocks. (There's the occasional high-profile lawsuit, of
course, such as the one which just ended with a 20 year sentence over
outright fraud in managing the Bayou fund, but that's pretty rare. Only
someone who was mentally impaired (and greedy) would think the kind of
fraud perpetrated in that case was necessary. The managers would have
made out OK even without it, and would have stayed out of jail... their
problem was they were too stupid to pick investments which even broke
even, all they could do consistently was lose money, and that eventually
drives away your clients, so they decided to cook the books in order to
stay in business.)
Arbitrageurs also win consistently, but again, they're not really
"trading", they're just taking advantage of a loophole in the market:
when two different financial vehicles which represent the same
underlying object have different prices, an arbitrageur will buy the
cheaper one and sell the more expensive one. They can't lose that way.
That, by the way, is the mechanism which keeps, e.g., short-term futures
prices and commodity prices in very close step.
The professional money managers -- and professional brokers in general
-- have, with few exceptions, shown themselves consistently unable to
outguess the market. It appears that they suffer from a "herd
mentality" which makes it difficult for them to see which stocks are
undervalued -- they're mesmerized by the stocks which are popular among
their peers. Consequently, when they're acting as "traders", they don't
come out any better than anyone else. It's only when they find some
niche which involves /no/ risk, like acting as a floor trader (who makes
money on the offered/asked spread), that they come up consistent winners.
In this way, the market is a lot more like a horse race than it is like
21. In 21, you're playing against the dealer, and if you play well
enough, the dealer loses. In a horse race, you're playing against other
bettors, /not/ the house. The house doesn't bet; it just skims off a
percentage of the take. That's exactly how the market works; the big
boys get their money no matter who "wins" or "loses". Granted there are
exceptions -- Peter Lynch, for example, consistently outguessed the
market, and got higher fees as a result, but he still wasn't gambling
with his own money. And venture capitalists sometimes make out very
well by gambling in stock of not-yet-public companies. But I'd be hard
pressed to think of anyone who got or stayed rich by gambling in common
stock of public companies using his own money.
The concern I raise is that the "count", using the 21 analogy, is
getting very out of contact with reality. When this has happened in
the past, the market has always corrected rapidly. My question was
asked to see if any of you sense the same thing. This is important to
anyone who owns stocks because if such a correction occurs, all
stocks, even the good ones, will go down a lot. Its always better to
get out of the game before the house goes broke and can't buy back the
chips.
Ed
R C Macaulay wrote:
The difficulty in understanding the stock market has it root in not
recognizing exactly what it is.
The stock market is a legal form of gambling. It IS the great game !
Of the gambling casino parlours in the great game.. commodities are
the roulette tables. The players at this table operate similar to a
duck hunter pulling the trigger today at a duck that will fly over
months from now, hoping the duck will fly into the shot pattern. The
original purpose of this parlour was to provide a way for farmers to
insure next year's crop, or any commodity against sudden drop in
market price below the cost of production. Oil speculators turned the
crude oil market into a whore's market some 20 years ago when they
begin trading crude futures. China got into the game 2 years ago by
buying up strategic metals and stuff and such. Few can grasp they may
actually be holding food grains commodity futures hostage.
Wall Street is a private club where membership costs real money and
the game is controlled by the house. A share of stock.. any stock is
only worth what you can sell it for. It used to have some
relationship with a company's net worth and/or assets and keyed to
the dividend paid each year. NO MORE.. few dividends are paid out
anymore and the value to the owner of a share is based on
anticipating a share will rise like WalMart did. 25 years ago or a
Google share. In today's world a share has a inverse relationship to
the big buyers of stocks and bonds.. who are they?? pension trusts,
insurance and banking.. but the largest holders of stocks and bonds
are the "shadows people" of the hedge and derivitive outerworld (
similar to the underworld except no laws are ever made against the
shadows)
Little money received from an IPO actually goes into a capital
account since it's another parlour in the great game and the money
goes to the promotors in the form of both appreciation of share price
and share set asides for founders.
It comes as a great shock for Joe citizen to read an actual P&L
statement ( nearly impossile to fathom) to learn that a publically
held stock corporation is in debt up to their eyeballs from the sale
of BONDS , not common stock.
It is possible for a corporation to survive for years without ever
showing a profit.. just sell more stock and issue more bonds.
Example.. Krispy Kreme, Starbucks, Home Depot, Lowes. What really
surprises many is WalMart.
Never to ever give a sucker an even break.. GE is the biggest ,
richest corporation on earth and a look see into many large corporate
structures show a few "ex-GE" cadre .. like Home Depot.. ever wonder
why??
GE morphed from a manufacturer under Jack Welch into a strange new
"capital corporation". Their fingerprints and DNA are across the
world and behind the China trade and WalMart.
Consider Goldman-Sachs and Merrill-Lynch.. when the 1st qtr 2008
reports were due.. speculation was G-S and M-L and Citi-Bank would
look like Bear-Stearns on paper.... but the guys that print the
paper can put anything on the paper they wish and "BINGO".. G-S et al
came up smellling like roses while Bear Stearns wound up in the tank
and fished out by JPMorgan.
Hmmm.. Now the plot thickens and the really serious poker players are
placing their bets. It's sorta amusing when ya think about it....
It's all monolopy money to them since they print what they need.
The world's greatest game of all .. If you're big enough, tough
enough, smart enough to buy into the game.. they don't squeeze you
out.. but invite you in.. unless.. unless .. you don't play the game
by the rules.. OR.. they make an example of you.. like Enron.. go
straight to jail and do not pass go... occasionally one of the
players must be reprimanded , like Bear Stearns.. and gets a get outa
jail free card but forfeits his cards for the hand. After all... one
cannot be a gentleman and cheat at cards in the great game.
So if Edmund Storms has difficulty reading the face cards.. it's
because he is a scientist and not a stockbroker. Never play the other
man's game.
Fun stuff.. all that money and never enough.. ole Solomon lived the
life too and wrote an amazing book on the subject in his later life.
The poor simp chased his tail and tail to no avail .. grin
Richard
