This blog contains material I wrote and posted on between the years 2005 and 2011 only. It does not contain any new material. For newer writing, please check my main blog (Bill the Butcher).

Saturday, 24 November 2012

Game For Dolts

There used to be an old American confidence trick called the Money Machine, usually played by city slickers on rubes from the boondocks. It usually went along these lines: the city slicker used to claim that he had a machine that could double, treble, or quintuple any sum of money placed in it. He would invite the rube to try it out. The rube would hesitantly offer a small sum of money, a dollar or so, and right before his eyes the city slicker would feed the note into the machine and a fiver dollar note or something similar would emerge. Mightily impressed, the rube would wonder how much more of his money could be so converted. To this the slicker would say, “Any amount you care to name. Bring the money along to such and such a place, this public spot isn’t good for such deals.” And when the rube would bring his last dollar along to have it quintupled, of course, the slicker would find an opportunity to vanish with the money and leave the rube with some crudely forged notes or with nothing at all.

When a confidence trickster takes your money, promises to multiply it, and leaves you with trash, it’s considered cheating and a crime. If a company publicly takes your money, promises to multiply it, and then vanishes with it (for all practical purposes) it’s known as a stock market fluctuation.

I’d read a few times that in the stock market the small investor was the king, with the power to punish firms for poor performance by selling their shares and causing the value of the stock to drop. At the same time, the small investor (let’s call him Joe the was supposed to be the one who’d hurt the most from the manipulation of the market. His wealth it was said, would be the one that was hardest hit. The poor guy is an innocent victim of market forces.

Camel ordure.

The “small” investor, as these characters would know if they had any inkling of what they were talking about, is the small investor. If Joe the Punter invests, it is on a small scale and the amount will be peanuts to any self-respecting company. When Joe sells, he sells alone. He’s not going to set off a stampede. And Joe doesn’t have any strength as an investor. He ain’t no Warren Buffet or Bill Gates. When he sells, his few shares won’t drive the price down.

Of course, if Joe the Punter has any sense at all, and isn’t blinded by greed, he isn’t going to put his entire savings in shares, especially not the money he’s been putting aside for his retirement or to buy a house, or something like that. And if he’s got an iota more sense, he’s never going to invest in only one company or even in companies from one sector, information technology for instance. He’ll spread out his bets. His bets? Yes, bets. Because the share market is one big betting game.

Now the oddest thing about shares, of course, is that their nominal value has zero, zilch, nothing to do with their real value. The real value of a share should reflect the actual worth of a company, its actual production, its profits, and so on, right? The nominal value, though, is nothing more than a perception. Do I need to explain?

Suppose people have good feelings about a company. Suppose it’s hired a corporate hotshot as manager. Suppose it’s just landed a no-bids contract to build rendition centres in Iraq. Then they’ll want to buy the shares, and the nominal value of those shares will climb, and climb. This despite the company’s performance plumbing the lower depths. As long as the perception is good, the share price is high. This has nothing to do with the real value, which should be connected to actual performance and which never, ever, finds a mention. OK.

Now as I said, the small investor is a small investor, of no real value. The valuable investors are the big holding companies, which hold significant stock. Basically, the share market is theirs to do with as they wish. If they want to, they can go on buying sprees and drive the prices right up. And if they want, they can dump shares on the market, which will make the price collapse, and when the price is low enough they can buy more and drive the price right up again. This is as ethical as a knife in the back, of course, but how the hell are you going to prevent them from doing it?

Therefore, if Joe the Punter seriously believes that the company he owns shares in is in good hands simply because the stock price is high, he’s unfit to be an investor. His money isn’t in the hands of the people who run the company, and who might or might not have any residual loyalty to the firm. His money is in the hands of faceless corporations whose only watchword is profit, and who will do anything to achieve that profit. Playing with notional sums of money that have no corporeal existence is all in a day’s work.

Money can never come from nothing. It has to be earned. Joe the Punter and the Money Machine rube both forgot that and paid the price.

And that is why the stock market is a game for dolts.

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