The bottom line is that these are incredible times and there is no reason not to take advantage of them if one is fortunate enough to do so.
Robert - I attribute recent gains in internet and technology stocks more to momentum and speculative investing than to any recent revelation of the profit making potential of the firms in these sectors. The rules that used to be employed to relate a company's business to it's stock price no longer apply - in fact, there appear to be no rules these days (if you know of any, let me know). Since there are no rules, a stock can continue to rise without investor concern - we no longer know how to value stocks, we only know when to recognize when stocks are going up or stocks are going down (it doesn't matter how high or how low they go).
Investing in stocks has always been somewhat like gambling. Ten years ago when you bought a stock, you were essentially placing a bet - a bet that the company in which you were investing would do well. If the company did well, the stock would go up - and if it didn't do well, the stock would go down. You could enhance your chances of getting a positive return by placing an educated bet - by analyzing and understanding a company and it's business.
Today, buying a stock is like betting as well - but the bet no longer has anything to do with the company. When you buy a stock today, you are betting that others will buy the stock - the health and the business model of the company don't matter much, if at all. In placing an educated bet today, it is not necessary to know anything about a company's business - educated bets are based on knowing what other investors are doing or thinking.
What we've really seen is a shift from utilizing fundamental analysis to using technical analysis in placing a value on a stock - the shift represents a move from pricing a stock based on the profitability and business of the company it represents to pricing a stock based on the buying or selling momentum of other investors. TA probably originally evolved from the notion that an individual investor does not have the ability or capacity to research and understand all companies - and as such, it would be better to rely on other investors that do - and so by charting the price movement of a stock, an investor could assume that others in the know are causing the stock to move, and follow their moves. But if everyone is doing TA, then we are all essentially following each other.
Is this good or bad for our market economy? One could argue that it is good, because it is allowing some people to make a lot of money. I see it as being bad, however, for the following reasons:
1. Because there are no accepted rules, the rules could change at any time and cause stocks to drop dramatically for little or no reason. This could have dramatic economic repercussions.
2. A lack of rules may be causing large sums of money to be diverted into businesses that don't have sound business models. This is always a risk. But I would argue that there are large sums of money flowing toward dot-com and b2b companies with little critical review of company business models, and little or no analysis of projected revenues and profits. Money flows to these companies directly through IPOs, as stock currency, and as rewards to executive insiders who own large numbers of stock options. One could make a strong argument that if investors become less critical in evaluating fundamentals that there is an increased risk that capital will be wasted on companies that don't have strong business models. I would argue that this is happening at a level not seen in our markets in quite some time.
3. Because there are no rules, there is a risk that there is no capital creation from underlying businesses to accompany stock prise rises. If this is the case, than the wealth that is being generated from the stock market is really the result of shifting of money from one investor to another, and nothing more - buying a stock today is a much purer form of gambling than it was ten years ago. Investing in stocks has become very popular over the past few years - and will become more and more popular in the coming years. And so you have more and more of the population that is spending a lot of time in what is essentially a gambling activity. I would argue that time spent in this activity might actually be having a negative impact on productivity. I'm sure that there are many workers in the US and elsewhere that spend a good deal of employer-paid time monitoring stock prices during market hours. Dramatic stock price increases can also be de-motivating to the extent that an employee that is already a millionaire via stock options may not have a desire to work as hard as he or she would otherwise - at an extreme, stock price increases remove some people from contributing to the economy by allowing them to retire early (this is good for the retiree - but it may not necessarily be good for the economy).
So, in short, I believe that if stock prices are not based on any rules, then when we invest, we're really just betting against each other - or I should say, we are betting with each other, as we tend to buy the stocks which are being bought by everyone else. And then it comes down to a bet of who will sell first.
I am finding myself contributing to charities as I have never done before. Is that such a bad thing?
Certainly not a bad thing, in fact a good thing in my view - and you are to be commended for it.
Thanks,
-Eric |
