Stock Markets aren't Real
From Zanecorpwiki
Contents |
Overview
The idea in a nutshell is this: buying stock in the secondary market is purely an issue of pricing. There is no investment because the company doesn't get any of that money. The money doesn't go to capital development of any kind. It doesn't increase output. It doesn't do anything but price the stock.
What Happens to the Money
As far as the real economy is concerned, nothing.[notes 1]
It's a Pricing Market
What the stock market represents the pricing judgment of millions of actors--plus some cynical manipulation. However, even the most cynical manipulation is if not inconsequential, then small in comparison to the market as a whole.
Despite the ups and downs and drastic swings, the stock market does a really good job of telling us what's good and what's bad. Certainly, there are runs and mass delusions, unsupported trends, etc. but overall, the stock market is probably the closest thing we have to a "real side" indicator both in aggregate and for individual companies.
This Ignores Secondary Effects
The smart guy makes more money and then uses that money in the real side. In other words, even if the stock market isn't a creator of wealth, it redistributes wealth to those who know best what to do with wealth.
In aggregate, this may actually be true. However, I would claim that the stock market is inefficient. First, it's very vulnerable to manipulation in my view. Not catastrophically so, but enough to say that those who profit the most from the stock market aren't "the smartest", but are rather the ones in a position to game the system.
The second issue is that success in the stock lives in "Extremistan" where outliers and unpredictable swings mean more than the mainstream. The net effect is that we can say, with statistical, analytical backing, that significant success in the stock market is due more to luck than smarts. In other words, the more successful you are, the more likely it is that you were lucky and the less your individual talents had to do with it.[notes 2]
TODO: ref Extremistan, the black swan and econ talk.
Small Tweaks
IPOs are a Different Thing
The first thing to understand is that IPOs are a different thing. These represent actual investment in the company.
Dividends Make a Difference, but Not Much
Dividends change the game because they represent ongoing, real interest in the company. Dividend paying stock represents a real claim on future earnings. Dividend paying stocks are thus half real. They represent a real investment as far as the purchaser is concerned. The problem is that they still don't provide any investment to the company.
Notes
- ↑ I refer to real side economics here not as a pure real sider, but as one who believes there is truth to both the real and monetary economic views.
- ↑ I'll grant there appear to be exceptions. Warren Buffet being everyone's favorite. But that's just the point... they're exceptions to the rule.
