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You point out some potential benefits, and others have pointed out
specific examples. I agree with these, but my argument is not that
the stock market should be abolished. It does provide value. My
argument is that it's got flaws that are getting worse, and thus
should be recognized.
What of examples like Enron where executives obfuscated the records,
made millions to billions, then screwed everyone else when it
collapsed? Or the CEOs who inflate the value, cash out in the stock
market, then leave before the company collapses into ruins in a
series of buyouts? In these cases the stock market and the traders
and the collective wisdom are easily fooled, and get fooled over and
over again, at least in the short run. But the way the stock market
works incentivizes these short term illusions because it creates the
ability to get really rich because of them. As stocks trade faster
and easier and information becomes more distant from the traders this
will become more prevalent, or so I believe.
How do we fix that without removing the collective wisdom evaluation
of corporate strategies? Though additionally I'll put my faith in a
handful of experts over the collective wisdom any day. I think the
collective wisdom lags and follows those who really understand the
companies and technology anyway.
As far as short-selling companies who are pursuing the above
strategies, I think that is a good strategy, and I'm sure there are
some who do make a profit doing that... but it requires longer term
thinking and longer term strategies to do so, and the fact that we're
moving away that as a society means that such strategies won't
counterbalance the problem. Though again the stock market alone
isn't the only cause of short term thinking. I just think it's one
piece of the issue, and perhaps one that could be adjusted to help
improve it.
Dave
On Aug 21, 2007, at 8:44 PM, Daniel Reeves wrote:
> Not only do I disagree with Dave, I'll go so far as to claim he
> disagrees with his own position. If not, Dave, why not make a
> killing shorting stock of the next company to do a round of layoffs
> for the sake of a short term boost in stock price? The market is
> smarter than we think.
>
> Nor do I have a beef with day traders. Either they're providing
> valuable information to the market or they're going to get smacked
> hard. (In expectation at least.) In any case, they're paying a
> fair rate for the money they borrow and no matter how little time
> they own a stock they are, in aggregate, contributing to the
> investment in those companies. (And short-selling is just borrowing
> stock, later buying it to pay back the loan, so nothing slimy about
> that, contrary to popular conception.)
>
> I used to be like Dave, pointing to a litany of "obvious" flaws in
> the market (stock market or "the market" more generally, like
> microsoft being sucky (for me) yet rich). But the market had a
> habit of being smarter than me and I've learned some humility in
> this regard.
>
> As for Dave's specific allegation (the stock market focuses on
> short term gains), I don't think that's true. The stock price
> estimates (the per-share net present value of) the cumulative
> future cash flow of the company. The stock market estimates that
> better than any other known mechanism. It is of course prone to
> fits of hysteria but when it does it's taking a very *long term*
> (fantasy) view.
>
> That said, there are cases where markets fail and that is in the
> face of externalities. A classic example of an externality is the
> Tragedy of the Commons in which a bunch of farmers ruin a common
> grazing field because no one person has incentive to ration their
> use of it if no one else is. It's analogous to traffic congestion
> which is one of several reasons we need higher taxes (gas, roads)
> on driving. [1]
>
> The need to tax pollution is another classic example.
>
> Eugene's Starving Artist is an interesting example of a possible
> market failure. That might be explained in terms of externalities
> (positive this time) if the art was of a kind that couldn't be
> charged for by usage (public sculpture perhaps). In other words,
> you have free-riders.
>
> Eugene's Down On Their Luck example I believe is an argument for
> risk pooling, one form of which is the "social safety net", ie,
> welfare. It seems that participation should be optional though.
>
> Clare's Parasite CEO example I'm still thinking about...
>
> Danny
>
> [1] See:
> http://freakonomics.blogs.nytimes.com/2007/06/18/hurray-for-high-
> gas-prices/
> and add to the list that cars are dangerous to cyclists and skaters!
>
>
> --- \/ FROM Dave Morris AT 07.08.20 15:21 (Yesterday) \/ ---
>
>> I'll rephrase my claim:
>> "Playing the stock market with the objective of short term gains
>> does not contribute to society, and in fact actively harms it."
>> But I do think that is true. The stock market has some benefits,
>> and there are good reasons to have such a thing around, but ours
>> needs help.
>>
>> Stock prices can be a measurement of a companies performance, but
>> it can too easily be influenced in the short term for short term
>> reasons. I feel like it has become common for companies to trim
>> benefits packages, switch CEOs, cut R&D, and do other things which
>> provide a benefit the company for one quarter, and thus make the
>> stock market evaluation bounce when their profits look good for a
>> moment, but which have serious long term costs. The CEOs in
>> charge, and the investors, like this strategy because they can
>> profit from it, then get out before the stock goes down again in
>> the long run.
>>
>>
>> Many people lose from this- not only those holding the stocks when
>> the company goes down in general, but the employees of the
>> company, and those using the services of the company. The stock
>> market encourages short term thinking for short term gain and our
>> country has become swept up in this. I personally know people who
>> have had their companies destroyed this way. I feel like people
>> invest not so much with an idea for building long term stability
>> and high probability of reasonable returns, but as more of a get
>> rich quick theme. And furthermore computer trading and other
>> features have made it easier to trade shorter and shorter term
>> with little understanding or analysis of the companies involved.
>> So stock values become influenced by more trivial surface things,
>> because that's all these day traders have time to see. So now
>> companies are making trivial surface changes to satisfy the whim
>> of short term investors, at long term cost.
>>
>> There was a big discussion on NPR about hedge funds, stock market
>> trading of mortgages, and how it led to the creation of, and
>> current bursting of, the housing market bubble. Part of the
>> problem was that stock market investing had become too
>> disassociated from the things being invested in and the real long
>> term values thereof.
>>
>> Meanwhile most people, who work for the companies thus traded,
>> suffer. Ironically it's their own investment in stock market based
>> IRAs that helps drive the process.
>>
>> So I would argue that the system needs to change. Not that we need
>> to get rid of the stock market entirely, but that we need to shift
>> the way it works to put the focus back on valuing companies that
>> have good long term strategies, and less on valuing get rich quick
>> schemes. What if you had to own a stock for at least a month
>> before you could resell it? Or a week? Or a year? I'm not sure
>> where the right number would be, but it really seems to me that
>> traders who sign on in the morning, borrow $10M from a bank, trade
>> all day back and forth, return the $10M at the end of the day
>> having made $100k, they aren't really helping society, and could
>> be actually harming it in some real and significant ways.
>>
>> Of course part of this also is changing the attitudes of people
>> and whether they should be looking to get rich quick at any
>> expense, or whether they should be looking to help themselves, and
>> incidentally also society, in the long run. But from a top down
>> approach at least we can put in mechanisms that are designed to
>> encourage the latter instead of the former. We can't force
>> anything, and I wouldn't want that level of government control,
>> but right now I feel like we strong encouragements to the opposite
>> of what we want.
>>
>> In the meantime I'll make sure that my company is never publicly
>> traded so I don't have to worry about it. :-)
>>
>> Dave
>>
>>
>>
>>
>> On Aug 20, 2007, at 1:29 PM, Kevin Lochner wrote:
>>
>>> I have to take issue with Dave Morris re: "Playing the stock
>>> market does not contribute to society."
>>> Not only does a company's stock price influence its access to
>>> capital, but the respective stock prices of all companies provide
>>> information about the state of the economy that a ceo or
>>> entrepeneur may use in making strategic corporate decisions.
>>> Stock prices are determined primarily by people who are "playing
>>> the stock market".
>>> Investing in new companies does. It's a fine line, but
>>>> I think we've gotten too much separation of rich and poor in our
>>>> society because of the way our stock market currently operates,
>>>> and that could use some correction. I agree that inheritance
>>>> taxes are good as well, to help prevent too many generations of
>>>> people staying rich for free. But we should try to reign in the
>>>> various tricks which exist to leverage large sums of cash into
>>>> even larger sums via short term tricks in business and stocks
>>>> without actually contributing anything. Not only do they take
>>>> funds from people with less, they hurt the country overall.
>>>> But he is also correct- there's a wide variance of skill and
>>>> motivation in people, so there should be a wide variance in
>>>> income levels. I'd accept a factor of 100 variance from top to
>>>> bottom in salary as a reasonable maximum in relative value to
>>>> society that a person could be. Some people bust their asses
>>>> continuously to help the world. Some people actively try to live
>>>> off of others without contributing anything. I do have a
>>>> problem with the factor of 1000 or 10000 variances that
>>>> sometimes occur, but those are obvious flaws that are difficult
>>>> to correct.
>>>> Interesting to consider. :-)
>>>> Dave
>>>> On Aug 20, 2007, at 10:16 AM, Daniel Reeves wrote:
>>>>> We've been debating this essay
>>>>> http://www.paulgraham.com/gap.html
>>>>> and I thought I'd move it to improvetheworld...
>>>>> I'll start: Graham is so right! The income gap between the
>>>>> rich and the poor is wonderful!
>>>>> Actually it started more as a debate about the nature of
>>>>> capitalism and interest ("why should money 'grow'?"). Here was
>>>>> the gist:
>>>>> * [the economy] is a zero-sum game, isn't it?
>>>>> - no
>>>>> * those earning money are taking it away, even if only
>>>>> indirectly, from
>>>>> other people, no?
>>>>> - no, not if you think in terms of wealth (wealth = stuff you
>>>>> want,
>>>>> money = way to transfer wealth)
>>>>> * Or am I totally simplifying the haves vs. the have-nots with
>>>>> my pie
>>>>> metaphor?
>>>>> - yes, that's precisely the Daddy Model of Wealth!
>>>>> * Is it THEORETICALLY possible for no one to owe any money at
>>>>> all in this
>>>>> world, i.e., that everyone just has money that "grows"? Or does
>>>>> money
>>>>> only grow if it is taken away from others?
>>>>> - You're right, not possible, but for the opposite reason of
>>>>> what you seem
>>>>> to be suggesting. You grow money by giving it to someone
>>>>> (lending it),
>>>>> not by taking it away.
>>>>> It even got a bit heated, along the lines of "Trixie, I don't
>>>>> think it's right for you to lash out against capitalistic/
>>>>> yootlicious ideas without grokking the answers to your
>>>>> questions [above]".
>>>>> Oh, and I offered a yootle to the first person who could answer
>>>>> the quasiphilosophical question why money *should* grow, with
>>>>> the hint that it has to do with human mortality. I believe
>>>>> that's the only reason that holds in all circumstances.
>>>>> In any case, Trixie wanted to resume the debate and this is
>>>>> clearly the place to do it!
>>>>> DO NOT CHANGE THE SUBJECT LINE WHEN YOU REPLY (so it's easy for
>>>>> those not interested in this debate to delete the whole thread).
>>>>> Ok, go!
>>>>> Danny
>>>>> --
>>>>> http://ai.eecs.umich.edu/people/dreeves - - search://"Daniel
>>>>> Reeves"
>>>>> "Everything that can be invented has been invented."
>>>>> -- Charles H. Duell, Commissioner, U.S. Office of Patents, 1899.
>>>> Dave Morris
>>>> cell: 734-476-8769
>>>> http://www-personal.umich.edu/~thecat/
>>
>> Dave Morris
>> cell: 734-476-8769
>> http://www-personal.umich.edu/~thecat/
>>
>>
>
> --
> http://ai.eecs.umich.edu/people/dreeves - - search://"Daniel Reeves"
>
> "Try identifying the problem and then solving it."
> -- suggestion from Dilbert's boss
>
>
>
Dave Morris
cell: 734-476-8769
http://www-personal.umich.edu/~thecat/
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You point out some potential benefits , and others have pointed out specific
examples. I agree with these , but my argument is not that the stock market
should be abolished. It does provide value. My argument is that it's got flaws
that are getting worse, and thus should be recognized.=A0 What of examples
like Enron where executives obfuscated the records, made millions to billions,
then screwed everyone else when it collapsed? Or the CEOs who inflate the
value , cash out in the stock market, then leave before the company collapses
into ruins in a series of buyouts? In these cases the stock market and the
traders and the collective wisdom are easily fooled, and get fooled over and
over again, at least in the short run. But the way the stock market
works=A0incentivizes these short term illusions because it creates the ability
to get really rich because of them. As stocks trade faster and easier and
information becomes more distant from the traders this will become more
prevalent, or so I believe. How do we fix that without removing the
collective wisdom evaluation of corporate strategies?=A0 =A0Though
additionally I'll put my faith in a handful of experts over the collective
wisdom any day. I think the collective wisdom lags and follows those who
really understand the companies and technology anyway . As far as
short-selling companies who are pursuing the above strategies, I think that is
a good strategy, and I'm sure there are some who do make a profit doing
that... but it requires longer term thinking and longer term strategies to do
so, and the fact that we're moving away that as a society means that such
strategies won't counterbalance the problem.=A0 =A0Though again the stock
market alone isn't the only cause of short term thinking. I just think it's
one piece of the issue, and perhaps one that could be adjusted to help improve
it. Dave On Aug 21, 2007, at 8 :44 PM, Daniel Reeves wrote:
Not only do I disagree with Dave, I'll go so far as to claim he disagrees with
his own position. =A0 If not, Dave, why not make a killing shorting stock of
the next company to do a round of layoffs for the sake of a short term boost
in stock price? =A0 The market is smarter than we think . Nor do I have a
beef with day traders. =A0 Either they're providing valuable information to
the market or they're going to get smacked hard . =A0 (In expectation at least
.) =A0 In any case, they 're paying a fair rate for the money they borrow and
no matter how little time they own a stock they are, in aggregate,
contributing to the investment in those companies. (And short-selling is just
borrowing stock , later buying it to pay back the loan, so nothing slimy about
that , contrary to popular conception.) I used to be like Dave, pointing
to a litany of "obvious" flaws in the market (stock market or "the market"
more generally, like microsoft being sucky (for me ) yet rich). =A0 But the
market had a habit of being smarter than me and I've learned some humility in
this regard. As for Dave's specific allegation (the stock market focuses
on short term gains), I don't think that 's true. =A0 The stock price
estimates (the per-share net present value of) the cumulative future cash flow
of the company. =A0 The stock market estimates that better than any other
known mechanism . =A0 It is of course prone to fits of hysteria but when it
does it's taking a very *long term* (fantasy) view. That said, there are
cases where markets fail and that is in the face of externalities. A classic
example of an externality is the Tragedy of the Commons in which a bunch of
farmers ruin a common grazing field because no one person has incentive to
ration their use of it if no one else is. It's analogous to traffic congestion
which is one of several reasons we need higher taxes (gas, roads ) on driving.
[1] The need to tax pollution is another classic example. Eugene's
Starving Artist is an interesting example of a possible market failure. =A0
That might be explained in terms of externalities (positive this time) if the
art was of a kind that couldn't be charged for by usage (public sculpture
perhaps). =A0 In other words, you have free -riders. Eugene's Down On
Their Luck example I believe is an argument for risk pooling, one form of
which is the "social safety net", ie , welfare. =A0 It seems that
participation should be optional though. Clare's Parasite CEO example I'm
still thinking about... Danny [1] See:
http://freakonomics.blogs.nytimes.com/2007/06/18/hurray-for-high -gas-prices/
=A0 and add to the list that cars are dangerous to cyclists and skaters!
--- \/ =A0 FROM Dave Morris AT 07.08.20 :21 (Yesterday) =A0 \/ ---
I'll rephrase my claim : "Playing the stock market with the objective of
short term gains does not contribute to society, and in fact actively harms
it." But I do think that is true. The stock market has some benefits, and
there are good reasons to have such a thing around, but ours needs help.
Stock prices can be a measurement of a companies performance, but it can too
easily be influenced in the short term for short term reasons. I feel like it
has become common for companies to trim benefits packages, switch CEOs, cut
R&D, and do other things which provide a benefit the company for one
quarter, and thus make the stock market evaluation bounce when their profits
look good for a moment, but which have serious long term costs. The CEOs in
charge, and the investors, like this strategy because they can profit from it,
then get out before the stock goes down again in the long run. Many
people lose from this- not only those holding the stocks when the company goes
down in general, but the employees of the company, and those using the
services of the company. The stock market encourages short term thinking for
short term gain and our country has become swept up in this. I personally know
people who have had their companies destroyed this way. I feel like people
invest not so much with an idea for building long term stability and high
probability of reasonable returns, but as more of a get rich quick theme. And
furthermore computer trading and other features have made it easier to trade
shorter and shorter term with little understanding or analysis of the
companies involved. So stock values become influenced by more trivial surface
things, because that's all these day traders have time to see. So now
companies are making trivial surface changes to satisfy the whim of short term
investors, at long term cost. There was a big discussion on NPR about
hedge funds, stock market trading of mortgages , and how it led to the creation
of, and current bursting of, the housing market bubble. Part of the problem
was that stock market investing had become too disassociated from the things
being invested in and the real long term values thereof. Meanwhile most
people, who work for the companies thus traded, suffer. Ironically it 's their
own investment in stock market based IRAs that helps drive the process. So
I would argue that the system needs to change. Not that we need to get rid of
the stock market entirely, but that we need to shift the way it works to put
the focus back on valuing companies that have good long term strategies, and
less on valuing get rich quick schemes. What if you had to own a stock for at
least a month before you could resell it? Or a week? Or a year? I'm not sure
where the right number would be, but it really seems to me that traders who
sign on in the morning, borrow $10M from a bank, trade all day back and forth
, return the $10M at the end of the day having made $100k, they aren 't really
helping society, and could be actually harming it in some real and significant
ways. Of course part of this also is changing the attitudes of people and
whether they should be looking to get rich quick at any expense, or whether
they should be looking to help themselves , and incidentally also society, in
the long run. But from a top down approach at least we can put in mechanisms
that are designed to encourage the latter instead of the former. We can't
force anything, and I wouldn't want that level of government control, but
right now I feel like we strong encouragements to the opposite of what we
want. In the meantime I'll make sure that my company is never publicly
traded so I don 't have to worry about it. :-) Dave On Aug 20,
2007, at 1:29 PM, Kevin Lochner wrote : I have to take issue with Dave
Morris re: "Playing the stock market does not contribute to society ." Not
only does a company's stock price influence its access to capital, but the
respective stock prices of all companies provide information about the state
of the economy that a ceo or entrepeneur may use in making strategic corporate
decisions . =A0 Stock prices are determined primarily by people who are
"playing the stock market ". Investing in new companies does. It 's a fine
line, but I think we've gotten too much separation of rich and poor in our
society because of the way our stock market currently operates , and that could
use some correction. =A0 I agree that inheritance taxes are good as well, to
help prevent too many generations of people staying rich for free. =A0 But
we should try to reign in the various tricks which exist to leverage large
sums of cash into even larger sums via short term tricks in business and
stocks without actually contributing anything. =A0 Not only do they take
funds from people with less, they hurt the country overall. But he is also
correct- there's a wide variance of skill and motivation in people, so there
should be a wide variance in income levels. I'd accept a factor of 100
variance from top to bottom in salary as a reasonable maximum in relative
value to society that a person could be. Some people bust their asses
continuously to help the world . Some people actively try to live off of others
without contributing anything. =A0 =A0 I do have a problem with the factor
of 1000 or 10000 variances that sometimes occur, but those are obvious flaws
that are difficult to correct . Interesting to consider. :-) Dave On Aug
20, 2007, at 10:16 AM, Daniel Reeves wrote : We've been debating this essay
http://www.paulgraham.com/gap.html and I thought I'd move it to
improvetheworld ... I'll start: =A0 Graham is so right! =A0 The income gap
between the rich and the poor is wonderful! Actually it started more as a
debate about the nature of capitalism and interest ("why should money
'grow'?"). =A0 Here was the gist: * [the economy ] is a zero-sum game, isn't
it? - no * those earning money are taking it away, even if only indirectly,
from other people, no ? - no, not if you think in terms of wealth (wealth
=3D stuff you want, money =3D way to transfer wealth) * Or am I totally
simplifying the haves vs. the have-nots with my pie metaphor? - yes, that's
precisely the Daddy Model of Wealth! * Is it THEORETICALLY possible for no
one to owe any money at all in this world, i.e., that everyone just has
money that "grows"? Or does money only grow if it is taken away from others?
- You're right , not possible, but for the opposite reason of what you seem
to be suggesting. =A0 You grow money by giving it to someone (lending it),
not by taking it away. It even got a bit heated, along the lines of "Trixie,
I don't think it's right for you to lash out against capitalistic/yootlicious
ideas without grokking the answers to your questions [above]". Oh, and I
offered a yootle to the first person who could answer the quasiphilosophical
question why money *should* grow, with the hint that it has to do with human
mortality. =A0 I believe that's the only reason that holds in all
circumstances . In any case, Trixie wanted to resume the debate and this is
clearly the place to do it! DO NOT CHANGE THE SUBJECT LINE WHEN YOU REPLY (so
it 's easy for those not interested in this debate to delete the whole thread
). Ok, go! Danny -- =A0 http://ai.eecs.umich.edu/people /dreeves =A0 -
- =A0 search://"Daniel Reeves " "Everything that can be invented has been
invented." =A0 -- Charles H. Duell, Commissioner , U.S. Office of Patents,
1899. Dave Morris cell: 4-476-8769 http://www-personal.umich.edu
/~thecat/ Dave Morris cell: 734-476-8769
http://www-personal.umich.edu /~thecat/ -- =A0
http://ai.eecs.umich.edu/people /dreeves =A0 - - =A0 search://"Daniel
Reeves " "Try identifying the problem and then solving it ." =A0 --
suggestion from Dilbert's boss Dave Morris cell:
734-476-8769 http://www-personal.umich.edu /~thecat/
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